Petition — JBL Enterprises, Inc. v. Jhirmack Enterprises, Inc.

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82-2187 jacos |

JUN 28 1985

IN THE ALEXANDER L. STEVAS,

SUPREME COURT OF THE UNITED STATES CLERK

OCTOBER TERM, 1982

JBL ENTERPRISES, INC.,

JEAN ROBINSON, and

LOIS JEAN MILLION,

Petitioners,

Vv.

JHIRMACK ENTERPRISES, INC.,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

JOHN A. KITHAS

(Counsel of Record)

CHARLES LAMONT

KITHAS & LAMONT

111 Sutter Street, Suite 2140

San Francisco, California 94104

(415) 981-1492

Attorneys for Petitioners

DATED: June 27, 1983

QUESTION PRESENTED

The Ninth Circuit's decision in this dis-

tributor termination case raises a funda-

mental antitrust issue concerning the stan-

dard for testing the legality of a vertical

restraint on competition. The following

issue should be addressed together with

the issues to be considered in Monsanto Co.

v. Spray-Rite Service Corp., No. 82-914:

Is a manufacturer engaged in per se

unlawful price-fixing, when it com-

bines with others to enforce customer

restrictions which limit the sale

of its products to those customers

who insist on the restrictions pri-

marily to avoid retail price com-

petition.

This issue presents an important ques-

, tion of law regarding what conduct continues

to be vertical price-fixing since this

Court's decision in Continental T.V., Inc.

v. GTE Sylvania Inc., 433 U.S. 36 (1977).

PARTIES TO THE PROCEEDINGS

Petitioners JBL Enterprises, Inc.,

Jean Robinson and Lois Jean Million were

appellants below on the issue presented

for review. Respondent Jhirmack Enter-

prises, Inc. was appellee below on the

issue presented for review.

JBL Enterprises, Inc. has no parent

company, subsidiary or affiliate. Jean

Robinson and Lois Million are individuals.

iii

TABLE OF CONTENT'S

Question Preserited ....+:-+«-e-+4ee i

Parties to the Proceedings ...... ii

Table of Authorities... .. 2 sc « «V

Gea maots BOLOW. o's Fn Ge ke ole Ke

PURAMEPOCAOR 4 c« hee eo 6 e teks os

Statute Involved .....4++e+esee 38

Statement of the Case .......-. 3

Reasons for Granting the 3 ee a de

MN tg ag ae OMe a ee ve. es eee

Appendix

App. A: Ninth Circuit Order denying

petition for rehearing and

suggestion for rehearing

en banc, April 1, 1983

App. B: Ninth Circuit Opinion

affirming judgment,

February 8, 1983

‘App. C: District Court Judgment,

January 15, 1982

App. D: District Court Memorandum

of Opinion and Order,

July 9, 1981

iy a

App. E:

App. F:

District Court Findings

of Fact, Conclusions of

Law, and Memorandum of

Opinion, February 25, 1981

District Court Order Re

Defendant Jhirmack Enter-

prises' Motion for Summary

Judgment, September 19, 1979

TABLE OF AUTHORITIES

Cases Page

Blue Shield of Virginia v. 23

McCready, U.S. ;

ior S Ce. 2540 (1982)

California Retail Liguor 20, 26

Dealers Association v.

Midcal Aluminum, 445 U.S.

97 (1980)

Catalano, Inc. v. Target 18

Sales, Inc., 446 U.S. 643

(1980)

Cernuto, Inc. v. United de. 2G

Cabinet Corp., 595 F.2d 19, 20

164 (3d Cir. 1979)

Continental T.V., Inc. v. &. as

GTE Sylvania Inc., 433

U.S. TG (1977)

Dr. Miles Medical Co. v. 4, is,

John D. Park & Sons Co., 20, 26

220 U.S. 373 (1911)

Federal Trade Commission v. 19

Beech-Nut Packing Co.,

257 U.S. 441 (1922)

Poller v. Columbia Broadcasting 25

stem, Inc., 368 U.S. 464

Gey

United States v. Bausch & Lomb 19

Opticalco., 321 U.S. 707 (1944)

Cases

United States v. Park, Davis

& Co., 362 U.S. 29 (1960)

United States v. Socony- 19,

Vacuum 011 Co., 310 U.S.

150 (1

Statutes

15 U.S.C. § 1

15 U.S.C. § 15

28 U.S.C §1254(1)

Other Authorities

Steiner, Vertical Restraints

and Economic Efficiency,

Working Paper No. 66, Bureau

of Economics, Federal Trade

Commission (June 1982)

Page

’ e : ie

i yD feaitigt Sie, ia

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1982

JBL ENTERPRISES, INC.,

JEAN ROBINSON, AND

LOIS JEAN MILLION,

Petitioners,

Vv.

JHIRMACK ENTERPRISES, INC.,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners respectfully request

that a writ of certiorari issue to re-

view the judgment and decision of the

United States Court of Appeals for the

Ninth Circuit filed on February 8, 1983.

“hi, - ” 4.3

OPINIONS BELOW

The opinion of the Court of Appeals

is reported at 698 F.2d 1011, 1982-83

Trade Cases 765,199, and appears in

Appendix B to this petition. The two

opinions of the District Court are re-

ported at 519 F.Supp. 1084, 1981-2 Trade

Cases 764,158, and 509 F.Supp. 357,

1981-1 Trade Cases 463,870, and appear

in Appendix D and Appendix E, respec-

tively.

JURISDICTION

The judgment of the Court of Appeals

was filed on February 8, 1983. A timely

petition for rehearing with suggestion

for rehearing en banc was denied April l,

1983. Appendix A. Jurisdiction of this

Court is premised upon 28 U.S.C. §1254(1).

STATUTE INVOLVED

Section 1 of the Sherman Act, 15

U.S.C. §1, provides in pertinent part:

Every contract, combination in

the form of trust or otherwise,

or conspiracy, in restraint of

trade or commerce among the

several States, or with foreign

nations, is declared to be

iilegal « . «+ -«

STATEMENT OF THE CASE

This petition raises the question

of what conduct is vertical price-

fixing. Petitioners contend that a

supplier's refusal to deal with one

group of discounting retailers at the

insistence of another competing group

of retailers who desire to avoid price

competition, constitutes vertical price-

fixing. Cernuto, Inc. v. United Cabinet

Corp., 595 F.2d 164 (3d Cir. 1979). The

Ninth Circuit Court of Appeals disagrees.

This petition also presents the im-

portant issue, not yet addressed by this

Court, as to the proper standard to ap-

ply to a vertical restraint of trade

which takes both the form of a price-

fixing combination and a customer res-

triction. The facts of this case clearly

involve an interplay between the per se

standard consistently applied to vertical

price-fixing since Dr. Miles Medical Co.

v. John D. Park & Sons Co., 220 U.S. 373

(1911), and the rule of reason standard

applied to vertical customer restrictions

since Continental T.V., Inc. v. GTE

Sylvania Inc., 433 U.S. 36 (1977). In-

deed, this case demonstrates that Mr.

Justice White had good reason to be con-

cerned when he pointed out in his con-

curring opinion in Sylvania that a cus-

tomer restriction "prevents discount

stores from getting the manufacturer's

product and thus prevents intrabrand

price competition." 433 U.S. at 60.

Petitioners are former distributors

of Jhirmack Enterprises, Inc. ("Jhirmack"),

a manufacturer of hair care and cosmetic

products which are sold throughout the

United States. Petitioners allege that

they were victims of a price-fixing con-

spiracy when their distributorships were

cancelled in 1977 and 1978 for failure

to confine their sales to beauty salons,

barber shops, beauty schools, barber

schools and hair-styling establish-

ments (the "professional salon trade"

or "PST"). Instead, petitioners "di-

verted" Jhirmack products for eventual

resale by other types of retail outlets

that discounted the products, such as

drug stores and supermarkets ("over-

the-counter” or "OTC" outlets). Peti-

tionerse contend that Jhirmack violated

section 1 of the Sherman Act, 15 U.S.C.

§1, by combining with its distributors

and salons to prevent the diversion of

Jhirmack products to discounting OTC

outlets for the purpose and effect of

stabilizing and maintaining retail

prices.

The District Court Decisions

The complaint+/ charges as alter-

native causes of action, an illegal

price-fixing combination and an unreason-

able customer restriction.2/ Although

both claims are based on the same facts,

1/detitioners brought this treble

damage action under Section 4 of the

Clayton Act, 15 U.S.C. §15.

2/petitioner's original resale

price maintenance claim was dismissed

with leave to amend the complaint to

plead a cause of action of "a combina-

tion and conspiracy on the issue of re-

sale price maintenance." Appendix F.

The Court of Appeals correctly recites

that resale price maintenance was al-

(footnote continued on next page)

the Sylvania decision requires that the

customer restriction be tested for its

impact upon a relevant market. Ac-

cordingly, petitioners stipulated to a

court trial of issues regarding the

relevant market and Jhirmack's share of

the relevant market. Petitioners as-

serted that the salons so successfully

prevailed upon Jhirmack and certain

other suppliers of retail shampoos and

(footnote continued from preceding page)

leged, 698 F.2d at 1014, App. B-4, yet

erroneously states that no per se

claim of price-fixing was made prior

to the market trial. Id., App. B-6.

In their Memorandum Re Case Status,

written at the district court's request

when the case was reassigned, petition-

ers said:

Plaintiffs believe that price

motivation will warrant that a

per se standard be applied to

i 2

€ conduct. However, in the

event a rule of reason standard

applies, additional issues in-

volving relevant market and

anticompetitive impact must be

addressed,

CR 230, pp. 8-9 (See note 3, infra).

conditioners to prevent any competition

from OTC outlets, that retail sales by

salons at premium prices formed a dis-

tinct relevant submarket, of which

Jhirmack's products comprised a signifi-

cant share.

After a five-day trial the district

court rendered its findings of fact and

conclusions of law. 509 F.Supp. 357,

Appendix E. The district court focused

on the wholesale level of distribution

and defined the relevant market as the

sale of all beauty products to beauty

salons and other professional outlets.

Under this definition Jhirmack's market

share was less than 5%. Upon Jhirmack's

motion for summary judgment, the district

court concluded that with such a small

market share, Jhirmack could not have

imposed an unreasonable restraint upon

trade in the relevant market. 519 F.Supp.

at 1088, App. D-9.

The relevant market trial, however,

also produced findings of fact which

strongly support petitioners' claim of

price fixing. The district court found

that beauty salons insulated themselves

from price competition with drug stores

and supermarkets by insisting that Jhir-

mack and other suppliers sell exclusive-

ly to them, and not allow the products

to be diverted to OTC outlets. Other

findings clearly show that Jhirmack's

marketing scheme was designed to accommo-

date the salons' avoidance of intrabrand

price competition.

The district court explained how

the prevention of competition between

beauty salons and OTC outlets succeeded

in raising prices:

The essence of the entire contro-

versy is that beauty salons insist

on carrying only shampoos, condi-

tioners and other beauty products

which are not generally available

at OTC outlets. There is abun-

dant evidence that beauty salons

have discontinued buying certain

brands--including Jhirmack--once

the brands could be purchased at

drug and discount stores and

similar outlets. By their course

of conduct, therefore, salon

operators have generally prevented

direct competition with OTC out-

lets in the sale of particular

brands and have succeeded in

maintaining a price range for

shampoos and conditioners gene-

rally higher than that prevailing

at OTC outlets.

509 F.Supp. at 371, .App. E-40 - E-41,

The district court graphically

described the salons' efforts to insulate

themselves from competition with drug

stores as a "contrived fencing-in of a

segment of the market" and a "patently

anti-competitive practice." 509 F.Supp.

at 371, 376, App. E-41, E-63. The anti-

competitive purpose and effect of such

"fencing-in" was that salons charged

consumers higher retail prices for Jhir-

mack products than would have been

charged in a market free of restraint:

The testimony establishes that

salons could not maintain their

price levels for products like

Jhirmack if the same product were

widely available to the consumer

through OTC outlets, and that the

salons' ability to charge a prem-

ium price for a certain brand de-

pends on limited availability of

that brand.

* * *

Plaintiffs have shown that the

salon retail prices of brands manu-

factured exclusively for salons

were substantially higher than

prices of the same products sold

in OTC outlets through diversion.

It appears that when diversion of

an exclusive brand like Jhirmack

is slight, the limited availabil-

ity of the product in OTC outlets

at substantially lower prices does

not impinge on salons' ability to

maintain the regular premium

price. When diversion of an ex-

Cclusive brand becomes extensive

enough to cut into a salon's sales

of that brand, salons tend to dis-

continue that brand and find an-

other. Thus widespread diversion

of an exclusive salon brand pro-

vides a competitive check on the

salon's ability to sell that

brand at a premium price.

509 F.Supp. at 374, App. E-53 - E=-54.

The district court further found that

Jhirmack “catered” to the salons' desire

to avoid price competition.

As heretofore noted, some

manufacturers of shampoo and

conditioners produce for dis-

tribution exclusively within

the salon trade. They cater to

a strong demand among salons

for brands which are distribu-

ted exclusively to salons and

project an elite professional

image. Many salons decline to

sell products available in OTC

outlets, primarily in order to

avoid price competition. Salons

are generally unable to main-

tain premium prices for products

widely available at lower prices_

in OTC outlets.

509 F.Supp. at 375, App. E-59.

Jhirmack published suggested whole-

sale and retail price lists for the dis-

tributors and salons. CR 404, Exhibit

A, pp. 52-55, 57,2! The price structure

that Jhirmack promoted gave the salons

a 50% profit margin on the sale of re-

3/ The designations "CR" and

"TR" refer, respectively, to the dis-

trict court clerk's record and the

transcript of the market trial, which

were transmitted to the Ninth Circuit

Court of Appeals.

tail products. TR 307. Jhirmack's

marketing concept was that its products

would not be discounted and that the ‘sug-

gested prices would be maintained as

much as possible. CR 393, Exhibit D,

pp. 79-80. When distributors raised

wholesale prices to salons and thereby

cut into the salons' margins, Jhirmack

published the suggested wholesale

prices in trade magazines to discourage

any such deviations. CR 393, Exhibit

G, Exhibit H, pp. 123-124.

There is absolutely no question

that Jhirmack combined with salon owners

and distributors to prevent the sale of

Jhirmack products to OTC outlets that

would not adhere to Jhirmack's retail

prices. The district court expressly

recognized that “Jhirmack received com-

plaints from salon owners and distribu-

tors about instances of diversion to OTC

outlets, and took steps to identify

the distributors involved and dis-

courage this activity." 509 F.Supp.

at 363, App. E-9 - E-10. Jhirmack as-

sisted and cooperated with salon owners

and distributors in policing the market

by using batch code or lot numbers from

the bottoms of Jhirmack containers to

trace distributors, such as petitioners,

who sold diverted products. CR 393,

Exhibit B, pp. 136-137. Jhirmack's

president admitted that she maintained

a book with correspondence and lists re-

garding code numbers and information on

diverted products for the purpose of re-

cording instances of diversion. CR

393, Exhibit C, pp. 39-40. While all

this policing activity was transpiring,

Jhirmack's founder was constantly in

personal contact with salon owners at

beauty shows, seminars and clinics, re-

peatedly assuring them that Jhirmack

products would never be sold in drug

stores. CR 404, Exhibit B, pp. 40-41,

TR 326-327.

In the face of all these estab-

lished facts, the district court never-

theless dismissed the price-fixing claim

because there was no evidence "that

Jhirmack fixed the resale prices for

its products or enforced compliance

with a particular price schedule. 519

F.Supp. at 1088, App. D-10. Upon dis-

missal of Jhirmack's counterclaims,

judgment was entered. Appendix C.

Petitioners filed a timely appeal.

The Ninth Circuit Decision

The Ninth Circuit Court of Appeals

affirmed the district court's judgment

in all respects. 598 F.2d 1011, Appendix

B. Concerning the price-fixing claim,

the Court of Appeals agreed with the

district court that there was no evi-

dence of enforced compliance with a

particular price schedule. 698 F.2d at

1015, App. B-10.

Petitioners, however, argued in

both the district court and the Court

of Appeals, that setting prices at a

particular level is not a sine gua non

of a price-fixing claim. This case

falls within the fact pattern and rea-

soning of Cernuto, Inc. v. United

Cabinet Corp., 595 F.2d 164 (3d Cir.

1979). In Cernuto, the plaintiff com-

plained it was terminated as a dealer

in kitchen cabinets because a competing

dealer complained to its supplier that

plaintiff was discounting the cabinets.

The Third Circuit held that such facts

supported a per se claim of price-fixing

because the supplier's action was moti-

vated by its customer's desire to eli-

mMinate price competition. 595 F.2d at

166-169.

The Ninth Circuit distinguished

petitioners' case from Cernuto on the

two grounds that (1) petitioners were

not competitors of the salons who were

concerned about price competition from

OTC outlets, and (2) no distributors

complained about price competition from

petitioners. 698 F.2d at 1015, App.

B-10 - B-1l. Accordingly, the dis-

missal of this case on summary judgment

was affirmed despite the substantial

evidence in the record, recognized by

both the district court and the Court

of Appeals, that a combination existed

for the purpose and effect of eliminating

retail price competition between salons

and OTC outlets, and that petitioners

> ~

were terminated as distributors when

they were detected as a source of

supply to discounting OTC outlets.

REASONS FOR GRANTING THE WRIT

The Ninth Circuit rejected the per

se price-fixing claim in this case because

it concurred with the district court that

there was "'no evidence . .. that Jhir-

mack fixed the resale prices for its

products or enforced compliance with a

particular price schedule.' 519 F.Supp

at 1088." 698 F.2d at 1015, App. B-10.

This narrow definition of price-fixing

directly conflicts with the long standing

principle established by this Court that

price-fixing is more expansive than merely

setting prices at exact levels or adhering

to particular price schedules.—

4/ Catalano, Inc. v. Target Sales

Inc., 446 U.S. 643, 648 (1580) lelimination

(footnote continued on next page)

This Court's vertical price-fixing

decisions have condemned various forms of

concerted action by a manufacturer and its

wholesalers to control resale prices and

prevent intrabrand price competition.=

(footnote continued from preceding page)

of "discount" via uniform credit is price-

fixing); United States v. Bausch & Lomb

Optical Co., 321 U.S. 707, 720 (1944)

(price-fixing is requirement to sell at

"locally prevailing prices"); United States

‘v. Socony-Vacuum Oil Co., 310 U.S. 150,223

(1940) (price-fixing is “raising, depressing,

fixing, pegging, or stabilizing" prices).

See also Cernuto, Inc. v. United Cabinet

Corp., 595 F.2d 164, 168-169 (3d Cir. 1979)

(setting "exact level" of price "is not

a sine gua non of a per se violation...

under the price-fixing rubric").

3/ United States v. Park, Davis & Co.,

362 U.S. 29, 45 (1960) (wholesalers required

not to sell to retailer who deviated from

suggested resale prices); United States v.

Bausch & Lomb Optical Co., 321 U.S. 707,

720 (1944) (agreements with wholesalers to

resell only to licensed retailers who main-

tained locally prevailing prices); Federal

Trade Commission v. Beech-Nut Packing Co.,

257 U.S. 441 (1922) (wholesalers Sermittea

to deal only with retailers who maintained

suggested retail prices); Dr. Miles Medical

Co. v. John D. Park & Sons Co., 220 U.S.

373 (1911) (written agreements allowing whole-

salers to sell only to licensed retailers

who entered into price maintenance agree-

ments with the manufacturer).

Never has this Court suggested that their

illegality turned on setting of prices at

exact levels or adhering to particular

price schedules. The critical point is

that any vertical control of prices "des-

troys horizontal competition as effectively

as if wholesalers ‘formed a combination

and endeavored to establish the same res-

trictions by agreement with each other.'"

California Retail Liquor Dealers Associa-

tion v. Midcal Aluminum, 445 U.S. 97, 103

(1980); Dr. Miles Medical Co. v. John D.

Park & Sons Co., 220 U.S. 373, 408 (1911).

The Third Circuit Court of Appeals in

Cernuto, Inc. v. United Cabinet Corp., 595

F.2d 164 (3d Cir. 1979) has recognized

that a vertical combination is price-

fixing where its motivating factor is the

suppression of price competition at the

retail level, rather than the promotion

of competition at the manufacturer level.

595 F.2d at 168. The combination is per

se unlawful although it does not set prices

at an exact level because its purpose and

effect is to restrain price movement. 595

F.2d at 168-169.

Cernuto is not inconsistent with this

Court's Sylvania decision. £/

However, con-

fusion remains in the lower courts as to

what conduct is price-fixing, particularly

where non-price restraints are part of

the price-fixing scheme. The Third Cir-

cuit in Cernuto concluded that Sylvania's

tolerance of reasonable restraints to im-

prove the manufacturer's competitive posi-

tion" may not be converted into a blanket

allowance of any marketing decision made

by a manufacturer." 595 F.2d at 167-168

(original emphasis).

&/ This Court expressly noted in

Sylvania that vertical price restrictions

remain per se illegal. 433 U.S. at 51 n.18,

The Ninth Circuit refused to apply

the reasoning of Cernuto to the facts of

this case, which are certainly sufficient

to support petitioners’ claim that a com-

bination existed with the purpose and

effect of suppressing retail price compe-

tition. While cautiously conceding that

vertical restraints "may" be illegal

where their purpose and effect are to

limit horizontal competition, 698 F.2d

at 1015, App. B-11 - B-12, the Ninth

Circuit nevertheless distinguished peti-

tioners' case from Cernuto on two grounds

which signify that this Court of Appeals

misunderstands the fundamental reason

why the conduct in this case is price-

fixing.

First, the Ninth Circuit points out

that petitioners, as distributors, are

not competitors of the salons who are

retailers complaining about price compe-

nee

tition from other retailers. 698 F.2d at

1015, App. B-10 - B-1l1. Second, the Ninth

Circuit concludes that because no other

distributors complained about price compe-

tition from petitioners, id., App. B-1l,

there is no elimination of horizontal

price competition. Id., App. B-12 - B-13.

The Ninth Circuit therefore fails to recog-

nize that this case concerns a retail

price-fixing combination, which petitioners

as wholesalers can challenge because their

removal as a source of supply to discount-

ing retailers was a means of accomplishing

the anticompetitive result ._/

This failure is puzzling because the

i This Court has already held that

a Clayton Act §4 remedy is not "restricted

to those competitors whom the conspirators

hoped to eliminate from the market,” but is

available to those whose injury is "a neces-

sary step in effecting the ends of the il-

legal conspiracy." Blue Shield of Virginia

- McCready, __—Ss«~U.S. ___s,:-'10 »Ct. 2540,

2549 (1982).

Ninth Circuit's opinion does observe that

salons were concerned with maintaining

retail prices and complained about price

competition from OTC outlets. 698 F.2d

at 1013, 1015, App. B-3, B-10 - Bell.

This case does not turn on the un-

supported distinctions which the Ninth

Circuit makes regarding levels of dis-

tribution, but rather on the reason why

Jhirmack combined to enforce customer

restrictions. The Ninth Circuit fails to

grasp this fundamental point, and its

decision further confuses the law of

8 /

vertical price-fixing.— This is cer-

8/ This confusion is apparent froma

citation to this case by the Government in

its amicus curiae brief filed in support

of the petition for a writ of certiorari in

Monsanto Co. v Spray-Rite Service Corp.,

No.

proposition pte “the fact that a distri-

bution restriction indirectly exerts some

pressure on dealers' prices is not enough

to transform a nonprice arrangement into

resale price maintenance." Brief for the

United States As Amicus Curiae in Support

of Petitioner, 18 n. 25.

tainly a case in which “motive and intent

play leading roles"2/ in determining

whether the vertical restraint is price-

*“ixing, and the Ninth Circuit and other

lower courts faced with vertical res-

traint cases should not be allowed to

continue to lose sight of that principle.

Given Jhirmack's intention that its pro-

ducts not be discounted, and its combina-

tion with distributors and salons to ex-

clude discount outlets from selling its

products because of the salons' insistence

upon avoiding price competition -- an in-

sistence which the district court labeled

“patently anticompetitive” -- summary

judgment should not have been granted nor

affirmed. The summary dismissal in this

case is the result of the lower courts'

9/ »

Oller v. Columbia Broadcastin

Systen, Inc., 368 U.S. 464, 473 (1962)

inability to analyze properly what con-

duct continues to be price-fixing since

Sylvania.

The analysis must begin with a con-

tinued recognition that a combination

which tampers with price structures is an

unlawful activity, and this is so even

though the members of the price-fixing group

are in no position to control the market .22/

Accordingly, combinations formed for the

purpose of suppresssing price competition

in the sale of only one brand are illegal.

In Dr. Miles Medical Co. v. John D.

Park & Sons Co, ,r2/

and recently in Cali-

fornia Retail Liquor Dealers Association

v. Midcal Aluminum Inc. ,22/ this Court con-

10/ United States v. Socony-Vacuum

Oil Co., 310 U.S. 150, 221 (1940)

11/

—' 220 U.S. 373, 407-408 (1911).

12/ 445 u.s. 97, 103 (1980),

cluded that resale price maintenance is

equivalent to horizontal price-fixing

among dealers or retailers. The per se

illegality rests on the reasoning that a

manufacturer itself has no economic in-

terest in establishing resale priees,

therefore no purpose is served other than

the anticompetitive one of raising resale

prices. The Government, in its amicus

curiae brief filed in Monsanto, 23/ chal-

lenges the reasoning that resale price

maintenance would likely be used by

a manufacturer merely as a way to raise

resale prices because "a price-fixing

combination at the retail level would

tend to reduce quantities sold and there-

by damage a manufacturer's objectives, "L4/

13/

—'‘ Monsanto Co. v. Spray-Rite Service

Corp. , No . 82-914.

14/ Brief for the United States As

Amicus Curiae in Support of Petitioner,

21, 24-25.

This case, however, presents an

example of why a manufacturer would have

an anti-competitive purpose in maintaining

resale prices. When Jhirmack products

began to appear at discount prices in OTC

outlets, salons could not maintain their

premium prices, and more importantly, the

profit margin that Jhirmack's price struc-

ture offered them. As the district court

found, salons reacted to such competitive

pressure by discontinuing the purchase of

brands -- including Jhirmack -- which

could be purchased at discount stores.

509 F.Supp at 371, App. E-40 - E.41.

Jhirmack could react in several ways

to the competitive pressure faced by the

salons. It could, of course, maintain its

prices and its distributors' suggested

wholesale prices, and hope that discount

retail prices would eventually result in

increased OTC sales, and greater revenues.

Second, it could reduce its prices and its

distributors' suggested wholesale prices

as a way to preserve retail margins and

compete for the continued patronage of

its salon customers. This method would

subject Jhirmack and its distributors to

a squeeze on their profits, and would

leave them vulnerable to future reduc-

tions in margin because of further

retail discounting by OTC outlets.

Finally, Jhirmack could avoid the pres-

sures of retail discounting on its pro-

fits by preventing that discounting.

Jhirmack elected to pursue that last

course of action, which resulted in the

maintenance of premium prices to con-

sumers and a profit structure dependent

upon those premium prices.

The essence of competition among

manufacturers selling to salons, there-

fore, was the maintenance of retail pro-

fit margins for the salons. The question

which the Court of Appeals and the dis-

trict court failed to address in this

case is why Jhirmack acted to maintain

profit margins. Petitioners contend

that this inguiry detemnines the legality

of Jhirmack's conduct.

There is certainly an issue of

fact in this case as to whether Jhirmack

can reasonably argue that salon profit

margins must be preserved in order to in-

sure point-of-sale service. The district

court found that "consumers do value a

hairdresser's advice," but "the evidence

is not convincing that they need such

advice," 509 F.Supp. at 375, App. E-58 -

E-59. The facts in this case instead

suggest that the maintenance of prices

and profit margins was caused by the

salons' attempts to avoid competition

with more efficient retailers. The

vertical restrictions in this case

merely frustrate distribution effi-

ciency rather than achieving it as con-

templated by this Court in § lvania.+2/

This Court should not reject the

rule of per se illegality applied to

vertical price-fixing. Where ample evi-

dence exists, as in this case, of a com-

bination instituted to eliminate retail

price competition, then there is a suf-

ficient basis for a per se price-fixing

45/ Vertical restraints are often

caused by less efficient dealers and im-

pair the advancement of real distribution

efficiencies. Steiner, Vertical Res-

traints and Economic Efficiency, Working

Paper No. 66, Bureau of Economics, Federal

Trade Commission (June 1982). The anti-

trust laws must be concerned with more

than interbrand competition among manu-

facturers. The preservation of intra-

brand competition among different types

of retailers may result in increased dis-

tribution efficiency as manufacturers

shift to retailers with lower costs and

profit margins. Consumers therefore bene-

fit from intrabrand competition as well

as from interbrand competition.

.) 32

claim to be presented to the trier of

fact for a determination of what the

motive was for the combination. The

trier of fact should decide whether the

purpose of the combination was to elim-

inate intrabrand price competition, or

promote interbrand competition. If the

purpose of the combination was to elim-

inate intrabrand price competition,

there is a violation of the Sherman Act.

If the purpose of the combination was to

promote interbrand competition through

reasonably beneficial non-price benefits,

there is no violation of the Sherman Act.

in the absence of further proof that the

combination unreasonably restrained trade

in the relevant market.

Under this approach, the conflict

concerning application of the per se

or the rule of reason standard in verti-

cal restraint cases, can be reconciled.

Sk eid

Pa Note

A Be

CONCLUSION

For the foregoing reasons, a writ

of certiorari showid issue to review the

judgment and opinion of the Court of

Appeals for the Ninth Circuit.

DATED: June 27, 1983

Respectfully submitted,

JOHN A. KITHAS

(Counsel of Record)

CHARLES LAMONT

KITHAS & LAMONT

111 Sutter Street, Suite 2140

San Francisco, California 94104

(415) 981-1492

Attorneys for Petitioners

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Case No. 82-4102

JBL ENTERPRISES, INC., dba JHIRMACK OF

UTAH; JEAN ROBINSON; dba JHIRMACK OF

IDAHO and JHIRMACK OF BOISE; LOIS JEAN

MILLION, dba JHIRMACK OF NORTH CENTRAL

INDIANA, —

Plaintiffs-Appellants,

JHIRMACK ENTERPRISES, Inc.,

Defendant-Appellee.

Case No. 82-4107

AL BOOTH and THELMA R. BEAN, individually;

JHIRMACK OF WASHINGTON, D.C., INC.;

WALTER R. CECCHINI, JR., individually; and

JHIRMACK OF SOUTHWESTERN PENNSYLVANIA, INC.,

Plaintiffs-Appellants,

Vv.

JHIRMACK ENTERPRISES, INC.; IRENE REDDING,

ALBERT L. SCHWARTZ and GARY McCORD, indi-

vidually; INTERNATIONAL PLAYTEX, INC.,;

JOEL E. SMILOW, individually, and ESMARK,

INC.,

Defendants-Appellees.

ORDER DENYING PETITION FOR

REHEARING AND SUGGESTION FOR

REHEARING EN BANC

Filed April 1, 1983

A-1

ORDER

Before: MERRILL, DUNIWAY and FERGUSON,

Circuit Judges

The panel as constituted in the

above case has voted unanimously to deny

the petition for rehearing and to reject

the suggestion for rehearing en banc.

The full court has been advised

of the suggestion for en banc rehearing

and no judge of the court has requested

a vote on the suggestion for rehearing

en banc. Fed. R. App. P. 35.

The petition for rehearing is

denied and the suggestion for a rehearing

en banc is rejected.

APPENDIX _B-

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

No. 82-4102

JBL ENTERPRISES, INC. dba

JHIRMACK OF UTAH; JEAN

ROBINSON, dba JHIRMACK OF

IDAHO and JHIRMACK OF BOISE;

LOIS JEAN MILLION dba JHIRMACK

OF NORTH CENTRAL INDIANA,

F’aintiffs/Appellants,

Vv. |

JHIRMACK ENTERPRISES, INC.,

Defendant/Appellee.

JUDGMENT

Appeal from the United States

District Court for the Northern

District of California,

William W. Schwarzer, District Judge,

Presiding.

Filed and entered February 8, 1983

s/s

ae tk

APPEAL from the United States Dis-

trict Court for the Northern District of

California.

THIS CAUSE came on to be heard on

the Transcript of the Record from the

United States District Court for the

Northern District of California and was

duly submitted.

ON CONSIDERATION WHEREOF, It is

now here ordered and adjudged by this

Court, that the judgment of the said

District Court in this Cause be, and

hereby is affirmed.

APPENDIX B

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Case No. 82-4102

JBL ENTERPRISES, INC., dba JHIRMACK

OF UTAH; JEAN ROBINSON, dba JHIRMACK

OF IDAHO and JHIRMACK OF BOISE;

LOIS JEAN MILLION, dba JHIRMACK OF

NORTH CENTRAL INDIANA,

Plaintiffs-Appellants,

Vv.

JHIRMACK ENTERPRISES, INC.,

Defendant-Appellee.

Case No. 82-4107

AL BOOTH and THELMA R. BEAN, individually;

JHIRMACK OF WASHINGTON, D.C., INC.;

WALTER R. CECCHINI, JR., individually; and

JHIRMACK OF SOUTHWESTERN PENNSYLVANIA, INC.,

Plaintiffs-Appellants,

Vv.

JHIRMACK ENTERPRISES, INC., IRENE REDDING,

ALBERT L. SCHWARTZ, and GARY McCORD,

individually; INTERNATIONAL PLAYTEX, INC.;

JOEL E. SMILOW, individually; and ESMARK,

INC., .

Defendants~-Appellees.

OPINION

Appeal from the United States District Court

for the Northern District of California

William W. Schwarzer, District Judge,

Presiding.

Argued and Submitted December 17, 1982

Decided February 8, 1983

B-1

OPINION

Before: MERRILL, DUNIWAY and FERGUSON,

Circuit Judges.

FERGUSON, Circuit Judge:

These appeals arose out of a com-

mon scenario. The plaintiffs in both ac-

tions are former distributors of defendant

Jhirmack Enterprises, Inc. ("Jhirmack").

When their contractual relationships broke

down, the disappointed parties sought so-

lace (and treble damages) from the court,

alleging various antitrust violations

and related contract and tort claims.

Following summary judgment in favor of

the defendants, the plaintiffs appeal.

We affirm.

FACTS:

Jhirmack manufactures hair care and

cosmetic products which are distributed

throughout the United States by licensed

distributors. The company was founded

in 1968 by Jheri and Irene Redding. From

er ae

B-2

1972 to 1979 Jhirmack followed a marketing

strategy of making its products available

through beauty salons, barber shops, beauty

schools, barber schools and hair styling

establishments (the "professional salon

trade" or "PST") rather than through other

types of outlets, such as drugstores,

department stores and the like ("over-the-

counter" or "OTC" outlets). Such a limited

outlet strategy is often adopted by new

firms who wish to avoid the large adverti-

sing costs necessary to break into the

heavily competitive OTC market in hair care

and beauty products. To this end Jhirmack

contracted with several independent dis-

tributors, including the three JBL plain-

tiffs and the Booth plaintiffs, giving

each an exclusive geographic territory

and requiring each to "exclusively devote

its entire time and use its best efforts

to promote and sell” Jhirmack's products

to PST outlets in their respective terri-

sleet =

B-3

tories. The contracts also provide that

Jhirmack "will not appoint another distri-

butor within the territory," and set mini-

mum purchase quotas for each distributor,

based on Jhirmack's estimate of potential

PST accounts within the assigned terri-

tory.

In 1976-77, Jhirmack received

complaints from salon owners and distri-

butors that its products were appearing

in OTC outlets. Salons charge premium

prices for products sold to their cus-

tomers and prefer the prestige that flows

from carrying products not generally avail-

able. It is difficult for PST outlets

to maintain either prices or pres#ige. if

the product can be found in the local

supermarket at a substantially lower

price. Many PST outlets will therefore

refuse to carry products that are general-

ly available OTC. On receiving complaints

Jhirmack took steps to determine which

distributors were "diverting" its products

B-4

to OTC outlets and to discourage them from

doing so. |

In 1978, Jhirmack terminated the

JBL distributors for refusing to follow

Jhirmack's marketing plan and for failing

to meet its order quotas for their respec-

tive territories. JBL filed suit, alleging

that the terminations were the result of

illegal territorial and customer restric-

tions, resale price maintenance and illegal

tying arrangements in violation of federal.

antitrust law, and fraud or negligent mis-

representation in setting minimum purchase

quotas.

By 1979, Jhirmack had developed

sufficient name recognition to move into

the OTC market. After negotiations with

several companies, it. entered an agree-

ment with International Playtex, Inc.

("Playtex") in October 1979. In exchange

for the exclusive right to distribute

Jhirmack shampoos and conditioners to OTC

B-5

outlets, Playtex agreed to conduct a na-

tionwide marketing campaign, pledging to

spend seven million dollars the first year

and fifteen percent of annual net sales in

succeeding years promoting the products.

The contract specifically excluded the

professional salon trade, and Jhirmack

continued to use independent distributors

for its PST distribution.

In November 1979, Jhirmack sent

new distributor agreements to its PST

distributors, requiring them to recognize

Playtex as the exclusive OTC distributor

of Jhirmack shampoos and conditioners,

Booth refused to sign the new agreement

and so was terminated by Jhirmack in Decem-.

ber 1979. Booth then filed suit alleging

that the contract between Jhirmack and

Playtex violated the Sherman and Clayton

Acts and breached its own contract with

Jhirmack.

B-6

The JBL and Booth actions were con-

solidated for a limited trial on the re-

levant market and tying issues. JBL Enter-

prises v. Jhirmack Enterprices [sic], Inc.,

509 F. Supp. 357 (N.D. Cal. 1981). The

definition of the relevant market was cru-

cial to a determination of whether Jhirmack

possessed sufficient market power that its

vertical nonprice restrictions could amount

to an unreasonable restraint of trade. At

the time no claims of per se antitrust vio-

lation had been made except for the tying

claim. The district court concluded that

the relevant market was the market for

the sale of beauty products (including but

not limited to shampoos and conditioners)

to PST outlets. Under this definition,

Jhirmack's market share in 1976-78 was .

found to be 2.3%, 3.2% and 4.2%, respec-

tively.

Jhirmack then moved for summary

judgment against the JBL plaintiffs on the

B-7

ground that in light of Jhirmack's insig-

nificant market share the alleged res-

traints could not as a matter of law have

had the requisite adverse effect on com-

petition. JBL sought to avoid dismissal

on two theories: (1) that Jhirmack's

small market share did not establish lack

of market power because it faced no inter-

brand competition; and (2) that Jhirmack

engaged in price-fixing, a per se viola-

tion. The court rejected both theories.

On the fraud claim the court found that JBL

had presented no facts on two essential

elements. Summary judgment was therefore

entered on all counts. JBL Enterprises

v. Jhirmack Enterprises, Inc., 519 F.

Supp. 1084 (N.D. Cal. 1981).

In the Booth action, in opposi-

tion to defendants’ motion for summary

judgment, the plaintiffs raised a per

se claim of price-fixing, alleging that

Jhirmack and Playtex conspired to fore-

B-8

close price competition between Playtex and

Booth in the OTC market in violation of

Sherman Act § 1. The court granted summary

judgment for the defendants on this issue,

as well as on a claim against Playtex for

inducing breach of contract, and a claim

that Booth's termination breached an im-

plied covenant of good faith and fair

dealing. Summary judgment was denied on

the claim that Playtex's appointment

breached the exclusive territory clause of

the Booth-Jhirmack contracts, but this

claim was later dismissed and that dis-

missal has not been appealed.

Both sets of plaintiffs appeal

the respective grants of summary judg-

ment; the JBL plaintiffs also attack the

district court's determination of the

relevant market.

ANALYSIS:

I. The JBL Action

A. Per Se Price-Fixing

In Continental Tv., Inc. v. GTE

—

B-9

Sylvania, Inc., 433 U.S. 36 (1977), the

Supreme Court, while it did "not fore-

close the possibility that particular

applications of vertical restrictions

might justify per se prohibition,” id.

at 58, held that in general such nonprice

restrictions imposed by a manufacturer on

distributors or retailers must be tested

under the Rule of Reason. The Court found

that, while vertical restrictions reduced

intrabrand competition, they had redeeming

virtues in that they tended to promote

interbrand competition. Dealers would be

more likely to expend the effort necessary

to promote or service a product if they

did not have to worry about other dealers

of the same product taking a "free ride"

on their efforts. Thus the manufacturer

who imposed customer or territorial res-

trictions would be better able to enter

the market as a new competitor or maintain

its presence as an existing competitor

with other manufacturers.

B-10

JBL attempts to place itself out-

side the reach of GTE Sylvania by allega-

tions of a conspiracy among Jhirmack,

other distributors, and salons to eliminate

JBL as a competitor so as to reduce price

competition. Its attempt fails.

First, the district court found

"no evidence ... that Jhirmack fixed the

resale prices for its products or enforced

compliance with a particular price schedule."

519 F. Supp. at 1088. Nor was there any

indication that suggested prices were in

fact adhered to. Thus JBL cannot rely on

United States v. Bausch & Lomb Optical Co.,

321 U.S. 707 (1944), where nonprice res-

traints were imposed to facilitate a ver-

tical price-fixing scheme.

Second, JBL was not a competitor

-of the complaining salons. Rather, the

salons were customers of distributors like

JBL. Although the salons may have been

concerned with maintaining the prices they

B-11

charged consumers, the price competition

they faced was not from JBL but from other

retailers, especially OTC outlets that .

carried competing brands.

Third, the other distributors,

who would have been in competition with

JBL but for the territorial restrictions,

were not concerned with eliminating price

competition from JBL. There is no indi-

cation that the complaining distributors

wished (or thought they were permitted)

to make sales to the OTC outlets at all,

much less at a higher price than that

charged by JBL. Rather, the clear indi-

cation is that the complaining distri-

butors were concerned that their customers

(the salons) would stop carrying Jhirmack

products if the diversion continued.

Per se condemnation of apparently

vertical restraints may be appropriate

where the purpose and effect of those

restraints is to limit horizontal compe-

B-12

tition. In Cernuto, Inc. v. United

Cabinet Corp., 595 F.2d 164 (3d Cir. 1979),

plaintiff claimed it had been terminated

as a dealer:in United's line of kitchen

cabinets because a competing dealer com-

plained to the manufacturer that the plain-

tiff was discounting the cabinets. The

Third Circuit found that "a manufacturer

deliberately withdrawing its product from

a distributor that resold it for a price

less than its competitor at the request

of the competitor,” 595 F.2d at 166,

would constitute a per se violation. It

based its decision on the pernicious ef-

fect of the practice--elimination of pos-

sible price competition from the foreclosed

dealer--and the lack of any redeeming vir-

tue. The court noted that generally manu-

facturers are free to impose vertical ter-

ritorial restrictions, but that two fac-

tors made United's alleged action unlaw-

ful. First, the action was taken at the

er Se xy ' -

ees. we Tee eee

B-13

behest of a competitor on the same level as

the plaintiff; thus the restraint was hori-

zontal rather than vertical in purpose and

effect. Second, the complaining dealer

was allegedly seeking to eliminate price

competition. 595 F.2d at 168.

In order to make out a claim un-

der the reasoning of Cernuto, JBL would

have to allege that a competitor of JBL

prevailed on Jhirmack to terminate JBL in

order to eliminate either actual or poten-

tial price competition from JBL. No such

allegation was made, and the district

court correctly granted summary judgment

on the price-fixing claim,

B. Market and Market Share

All parties agreed to a separate

trial to determine (a) the relevant product

and geographic market, (b) Jhirmack's

share of that market, and (c) whether

Jhirmack imposed per se unlawful tying

arrangements. Only the market findings

are appealed. These are findings of fact

sy"

“S

ee OT

Ny Malet 5

WE! Pit : .

rey et Ne ee ok De

B-14

and thus subject to a clearly erroneous

standard of review. Twin City Sportservice

v. Charles 0. Finley & Co., 676 F.2d 1291,

1299 (9th Cir. 1982). Although market defi-

nitions are inherently imprecise, the dis-

trict court's determination is supported

by the available evidence and must be up-

held.

As this circuit stated in Gough

v. Rossmoor Corp., 585 F.2d 381, 389 (9th

Cir. 1978), cert. denied, 440 U.S. 936

(1979), analysis of whether a particular

action restrains competition involves a

consideration of its impact "within the

field of commerce in which the plaintiff

was engaged and upon those commercially

engaged in competition within it." In

determining what the field of competi-

tion is, “courts are not free to accept

whatever market is suggested by the plain-

tiff," id. at 389, but must examine the

commercial realities within the industry

in question.

B-15

Defining the market in a case such

as this one is actually a two-step process.

First the field in which the plaintiff

was engaged must be defined in geographic

and distributional terms. Then the pro-

duct (or product line) that competes in

that field must be determined. Since the

parties stipulated as to the geographic

market, the two determinations may be

referred to as defining, respectively,

the "distributional market" and the "pro-

duct market."

The district court defined the

relevant market as "the sale of beauty

products, including but not limited to

shampoos and conditioners, to beauty salons

and other professional outlets." 509 F.

Supp. at 369. Under this definition,

Jhirmack's market share was less than 5%.

JBL disputes both the product and the dis-

tributional market determinations, and

argues that the market should be defined

B-16

as the sale of shampoos and conditioners

alone either to professional outlets or,

alternatively, by professional outlets.

Although, as stated above, the district

court found that the relevant market

existed at the wholesale level (sales

to salons), it carefully considered

claims that a distinct submarket existed

in the sale of shampoos and conditioners

at the retail level (sales by salons).

The court concluded, however, that if

the relevant distributional market were

to be found at the retail level, PST out-

lets faced competition from OTC outlets

selling similar products, and so the rele-

vant market would be the sale of shampoos

and conditioners by all retail outlets.

Under this market definition, Jhirmack's

market share would have been less than

1% of shampoos and approximately 2% of

conditioners.

B-17

We find it unnecessary to addres

these alternative findings, however, be-

cause the district court correctly defined

the relevant distributional market. JBL

is engaged in the distribution of Jhirmack

products to specific retailers, i.e., it

operates as a wholesaler. It competes for

PST customers with other wholesalers--some

of whom also carry a single (competing)

line, others of whom carry the products of

many manufacturers.

The court's product market deter-

mination must also be upheld. The stan-

dard Sut of the product market is that

it comprises those "commodities reasonably

interchangeable by consumers for the same

purpose." United States v. E.I. du Pont

de Nemours & Co., 351 U.S. 377, 395 (1956).

However, this principle must be applied

with reference to the specific market in-

volved. So long as the distributional

market is set at the wholesale level, the

Ve te SOR ee

B-18

fact that face creams and shampoos do not

have the same use for the consumer is not

as relevant as whether a "cluster" or

"product line" of one manufacturer is

reasonably interchangeable for that of

another by the salon that is making the

purchase.

This cluster approach is appro-

priate where the product package is sig-

nificantly different from, and appeals

to buyers on a different basis from, the

individual products considered separately.

Thus the full service features of commer-

cial banks led the Supreme Court to find

a cluster of products and services as

the relevant product market in United

States v. Philadelphia National Bank,

374 U.S. 321, 356 (1963), and United

States v. Phillipsburg National Bank &

Trust Co., 399 U.S. 350, 360 (1970).

The rationale was that consumers do not

generally shop for individual banking

OW *~

,"s », Y

dy a

B-19

services, especially because it is usually

easier to obtain some services, e.g.,

loans, at the same bank where other ser-

vices, e.g., savings accounts, are held.

The approach was extended in A.G. Spalding

& Bros., Inc., v. FTC, 301 F.2d 585, 604

(3d Cir. 1962), where the court found the

relevant market to be “higher priced”

athletic goods because each of the major

manufacturers promoted and distributed

such goods as a line.

In this case, eighty percent of

Jhirmack's sales were of shampoos and con-

ditioners. It did, however, manufacture

a full line of beauty products and required

each distributor to purchase a small amount

of each product for potential sale to PST

outlets. The industry generally considers

it necessary to carry a full line, and ad-

vertising and promotion often group the

products. Although salons do purchase

individual products, this generally oc-

B-20

curs when the particular product is not

available in the main product line chosen

by the salon. The court thus reasonably

concluded that Jhirmack faced competition

(at the wholesale level) for PST sales from

other product lines, and not only from

other shampoos and conditioners.

C. Market Power

The trial court found that

Jhirmack's market share was 2.3%-4.2%

of beauty products sold to PST outlets

(or 1%-2% of shampoos and conditioners

sold by all retail outlets). These

shares are too small for any restraint

on intrabrand competition to have a

substantially adverse effect on inter-

brand competition. See, e.g., Ron

Tonkin Gran Turismo, Inc. v. Fiat Dis-

tributors, Inc., 637 F.2d 1376, 1379

(9th Cir. 1981) (1.87% or 5.2%); Mutual

Fund Investors v. Putnam Management Co.,

553 F.2d 620, 627 (9th Cir. 1977) (2% or

B-21

3%). JBL's contentions that Jhirmack pos-

sessed sufficient market power to signi-

ficantly affect interbrand competition

despite its insignificant market share are

unsupported and were properly rejected at

trial.

D. Fraud or Negligent Misrepresentation

JBL's contract with Jhirmack re-

quired JBL to purchase a minimum quantity

of products each month. The contract

states that JBL "acknowledges that the

minimum purchase requirements provided

herein are fair, just and reasonable." JBL

claims that this statement is a fraudulent

representation because the quotas were in

effect a statement of the minimum revenues

JBL could expect from the distributorship.

The district court found it "doubt-

ful that quotas incorporated into a dis-

tributor[']s agreement afford a basis for

a later fraud claim based on the distribu-

tor's failure to attain them." 519 F.Supp.

B-22

at 1089. Such a theory would, in effect,

make the manufacturer an insurer of the

distributor's business. The court found

it unnecessary to reach this issue, how-

ever, because it concluded that JBL had

failed to factually support two elements:

(1) that the representations were made

negligently or with intent to defraud;

and (2) that JBL relied on the representa-

tions. We find no error in this conclu-

sion.

II. The Booth Action

Booth contends that Jhirmack's

promise to it of an exclusive distribu-

torship meant that if Jhirmack moved into

the OTC market within Booth's territory,

it would have to do so through Booth,

Since the contract also specified that

Booth agreed to exclusively devote its

full time to the PST outlets, Jhirmack and

Playtex contend that the OTC market was

excluded from the contract. The district

B-23

court denied summary judgment on this is-

sue, and Booth has not appealed the later

dismissal of the claim. In any event,

this contract claim is irrelevant to

whether Jhirmack conspired with Playtex

to foreclose competition, violated a

covenant of good faith and fair dealing,

or was induced by Playtex to breach,

A. The Antitrust Claims

Booth claims that Jhirmack and

Playtex conspired to foreclose competition

in the OTC market for Jhirmack products in

order to allow Playtex to fix prices in

that market. It alleges, first, that the

agreement between Jhirmack and Playtex,

by giving Playtex an exclusive OTC license,

violated Sherman Act § 1; and second, that

its termination for refusing to accede to

that agreement likewise violates the Act.

Booth does not dispute that

Jhirmack could, without violating the

antitrust laws, decide to appoint only

B-24

one OTC distributor and refuse to appoint

any others, even if the net result of

this course of action was to shield the

sole distributor from potential price

competition. See GTE Sylvania, 433 U.S.

at 54-55; Ron Tonkin Gran Turismo, Inc.

v. Fiat Distributors, Inc., 637 F.2d at

1388. Booth's position, however, is that

there already was competition, or at least

potential competition, in the OTC market

(i.e., Booth), and that the agreement was

designed to eliminate that competition.

It is difficult to square the contention

that the Jhirmack-Playtex agreement would

decrease intrabrand competition without

increasing interbrand competition with

Booth's position that if Jhirmack wanted

to enter the OTC market it would have to

do so through Booth, who had an exclusive

territorial license. Had Jhirmack taken

the route suggested by Booth, it would

be Booth, and not Playtex, who would be

B=-25

insulated from price competition from any

other OTC distributor in its territory.

And Booth would not face any intrabrand

competition between PST and OTC outlets,

since it would control distribution to

both.

Although there are indications

that Jhirmack did not always interpret

its contract with Booth as prohibiting

sales to OTC outlets, it is clear that,

as the district court noted, "“Jhirmack's

products had not theretofore been offi-

cially distributed to OTC outlets, having

been generally limited to professional

outlets except for sporadic diversion.”

519 F. Supp. at 1091. It is also clear

that Jhirmack considered a substantial

promotional campaign as a prerequisite

to its ability to compete successfully

with other shampoos and conditioners

available in OTC outlets. Playtex's

promise to spend seven million dollars

0 ee ere ke ‘ i ay, De ae) | ner ue | ‘ie A Te eRe

B-26

on promotion during the first year of its

distributorship and substantial amounts

thereafter fulfilled that prerequisite.

While there is no allegation that. Jhirmack

would never have entered the OTC market

had it not been able to find a distributor

able and willing to engage in substantial

promotional activity, the admittedly

heavy interbrand competition existing

in the OTC market for shampoos and condi-

tioners makes it extremely unlikely that

it would have entered at the time it

did or that it would have been able to

add effectively to that interbrand com-

petition if it had chosen to do so with-

out such a campaign. Jhirmack considered

such an arrangement necessary and the

realities of the market make that assump-

tion quite reasonable.

The district court was therefore

justified in concluding that "(t]he

primary effect of the Jhirmack-Playtex

agreement on competition in OTC channels

B-27

was to add the competitive activity of

a major distributor and to increase the

amount of Jhirmack products available

to consumers in OTC outlets.... More-

over, the agreement also provided a new

source of intrabrand competition for

Jhirmack products sold in salons." 519

F. Supp. at 1091,

Since the initial agreement

between Playtex and Jhirmack did not

violate antitrust law, Playtex could

certainly ask Jhirmack for aid in en-

forcing it without incurring anti-

trust liability. Booth, like JBL, seeks

to invoke Cernuto, but again the situa-

tion is not analogous. In Cernuto, the

manufacturer had not granted an exclusive

license to any of its dealers, Rather

it was providing kitchen cabinets to both

dealers Famous and Cernuto, Famous, how-

ever, wanted to eliminate competition, and

used its influence over the manufacturer

B-28

to secure Cernuto's termination as a

dealer, thereby creating a net loss of

intrabrand competition without any net

increase in interbrand competition.

Under Cernuto's circumstances, per se

condemnation may be appropriate; under

the circumstances presented here, it is

clearly inappropriate.

B. Good Faith and Fair Dealing

Booth claims that Jhirmack

breached an implied covenant of good

faith and fair dealing by terminating

Booth for refusing to recognize

Jhirmack's “illegal” contract with

Playtex. Since that contract does not

violate the antitrust laws, the district

court properly rejected this claim,

Cc. Tortious Interference

The heart of Booth's tortious

interference claim parallels its anti-

trust claims. Booth argues that its

‘ contract with Jhirmack conferred on it

the right to sell OTC, that Playtex knew

B-29

Booth had that right, and that Playtex

induced Jhirmack to to take that right

away from Booth and give it to Playtex.

Whether Booth's contract did in

fact confer OTC rights on Booth so

that Jhirmack could have breached that

contract in giving those rights to Play-

tex is not at issue here. What matters

is whether Playtex knew that Booth had

OTC rights in its territory. The ele-

ments of a claim of tortious interference

are (1) a valid contract, (2) knowledge

of the contract and intent to induce its

breach; (3) breach; (4) causation, and

(5) damages. Richardson v. La Rancherita,

98 Cal.App.3d 73, 80, 159 Cal.Rptr. 285

(1979). In this case it is clear that

Playtex had no reason to believe that

Booth and other PST distributors had any

OTC rights and therefore could not have

intended that they be breached, Playtex

was worried that distributors who diverted tf

J - q v .

di psien Latta S34 Mt, , ‘

- bon hus Waa wy), WV Jhb we

Pate nl)’ RO AUG as Phra aT Toth ee ey ee ee Py "ee

B-30

products to the OTC market had not

bound themselves to incur heavy pro-

motion costs, and would be able to

"free ride” on Playtex's efforts, and

undersell it. But there is no indi-

cation that it considered that diver-

sion to be contractually sanctioned.

The district court's judgments

are AFFIRMED in all respects,

amie Ne)

APPENDIX C

‘

| UNITED STATES DISTRICT COURT

Sa NORTHERN DISTRICT OF CALIFORNIA

Case No. C-78-1227 WWS

4 JBL ENTERPRISES, INC., et al.,

Plaintiffs,

‘ Vv.

Ee v

: JHIRMACK ENTERPRISES, INC.,

: Defendant.

| JUDGMENT

Filed January 15, 1982.

JUDGMENT

This action having come on for

hearings before this Court, and the Court

having dismissed all claims and counter-

claims, no disputed issues of material

fact appearing,

IT IS ORDERED AND ADJUDGED

1. That plaintiffs JBL Enterprises,

Inc., Jean Robinson, and Lois Jean Million,

take nothing;

2. That counterclaimant Jhirmack

Enterprises, Inc., take nothing;

3. That the action, including all

counterclaims, be dismissed on the merits;

and

4. That each party bear its own

costs of the action.

DATED: January 15, 1982

s/ William W. Schwarzer

WILLIAM W. ER

United States District Judge

. atl

; SP

ite

: this

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Met) i ot ee Ee, ee 1G ede te. Mee 7 le lene nn) Fp ES Le See de epee hs Pe

APPENDIX D

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

Case No. C-78-1227 WWS

JBL ENTERPRISES, INC., et al.,

Plaintiffs,

Vv.

JHIRMACK ENTERPRISES, INC.,

Defendant.

CONSOLIDATED FOR LIMITED TRIAL WITH

Case No. C-80-0249 WWS

AL BOOTH, et al.,

Plaintiffs,

JHIRMACK ENTERPRISES, INC., et al.,

Defendants.

MEMORANDUM OF OPINION

* AND ORDER

William W. Schwarzer,

District Judge,

Presiding.

Filed July 9, 1981

> : age Seis. ie

BAS aay ¥: Bk 3 rok RT Se

OE Pe ON ae 2 eS = Ao eR ree a ES ee a OR fy Fy See

MEMORANDUM OF OPINION

AND ORDER

These cases are before the Court on

defendants' motions for summary judgment.

Pursuant to Pretrial Order No. l,

the Court has heretofore held a separate

trial on the issues of the relevant

market and the market share of defendant

Jhirmack Enterprises, Inc. ("Jhirmack").

The Court determined that for the pur-

poses of these actions the relevant mar-

ket comprises the sale of beauty products,

including but not limited to shampoos

and conditioners, to beauty salons and

other professional outlets, which is the

market in which plaintiffs competed.

Defendant Jhirmack's share of that market

ranged from 2.3% in 1976 to 4.2% in 1978.

Its share of total manufacturers' ship-

ments of beauty products for sale at re-

tail was 0.3%. Plaintiffs contended,

D-2

however, that the relevant market com-

prises the sale of shampoos and condi-

tioners to consumers for home use. If

that market were accepted, the court

determined, it would include all re-

tail sales, including drug and discount

stores and other over-the-counter (“OTC”)

outlets, in addition to beauty salons

and professional outlets. In that mar-

ket, Jhirmack's share of shampoo sales

was less than one percent and its share

of conditioner sales about two percent.

JBL Enterprises, Inc. v. Jhirmack

Enterprises, Inc., 509 F. Supp. 357,

366-69, 376 (N.D. Cal. 1981).

The Court also determined that

Jhirmack's requirement that each dis-

tributor order a specified quantity of

a new product in his next regular or-

der following the product's introduc-

tion constituted a tying arrangement

but, because of Jhirmack's lack of

D-3

market power, did not amount to a per se

violation. Accordingly, the lawfulness

of that arrangement must be tested, just

as the customer and territorial restraints

¢ “plained of here, under the rule of

reason. (509 F. Supp. at 376-79)

Following the issuance of the Court's

ruling, all defendants moved for summary

judgment on all claims. Because the res-

ponses of plaintiffs in the JBL action

and of plaintiffs in the Booth action

raise different issues, the actions will

be separately treated.

I. The JBL Action

This action was filed in 1978 by a

group of Jhirmack distributors in Utah,

Idaho and Indiana. The amended complaint

charged that beginning in 1974 Jhirmack

(1) coerced plaintiffs into accepting

unreasonable territory and customer

restrictions precluding plaintiffs from

discounting Jhirmack products by divert-

D-4

ing them outside of the assigned chan-

nels of trade, i.e., distributing them

to others than beauty salons and other

professional outlets, and (2) fixed

prices by eliminating discounting of

its products thereby inhibiting its dis-

tributors from competing. In addition

plaintiffs charged a tying violation:

that as a condition of purchasing

Jhrimack's products and using its trade-

names and trademarks, plaintiffs were re-

quired to make one-time purchases of cer-

tain undesired products. (509 F. Supp.

at 376) These plaintiffs also alleged

that Jhirmack made fraudulent representa-

tions regarding the setting of quotas

for the sale by distributors of Jhirmack's

products.

A. The Antitrust Claims

Defendants have moved to dismiss the

antitrust claims principally on the ground

that in view of Jhirmack's insignificant

ae a oo ar a - ee ca

D-5

market share the evidence as a matter

of law establishes that the alleged

restraints could not have had the re-

quisite adverse effect on competition

in the relevant market. See Gough v.

Rossmoor Corp., 585 F.2d 381, 389 (9th

Cir. 1978), cert. denied, 440 U.S. 936

(1979); DeVoto v. Pacific Fidelity Life

Ins. Co., 618 F.2d 1340 (9th Cir.) cert.

denied, ‘7,8. , 101 S.Ct. 206

(1980). ‘

The JBL plaintiffs make two argu-

ments in response:

(1) That the restrictions imposed

by Jhirmack had a substantial effect on

competition;

(2) That Jhirmack combined with

certain distributors in enforcing ter-

ritory and customer restrictions to elim-

inate discounting, thus forming a resale

price fixing scheme which was a per se

violation of the antitrust laws.

D-6

1. Effect on Competition

The JBL plaintiffs contend, in sub-

stance, that although Jhirmack enjoyed

less than 2% of the retail market for

shampoos and conditioners, it possessed

sufficient market power for its restric-

tions to have a substantial impact on

competition because it faced no interbrand

price competition in the sale of shampoos

and conditioners to professional outlets.

As they put it:

Despite such small market

share, Jhirmack possessed the

market power to raise retail

prices above the competitive

price prevailing.

(Memorandum, p. 19)

The “competitive level” of prices

against which plaintiffs measure Jhir-

mack's prices are the prices of similar

products in OTC outlets. The argument

is that Jhirmack shampoos and condi-

tioners were sold at higher prices than

other brands, even other salon brands,

and that it was only when Jhirmack

D-7

shampoos and conditioners were available

at lower prices at drugstores and super-

markets, through diversion, that the

salons’ ability to sell Jhirmack products

at a premium price was affected. Plain-

tiffs conclude that the only price compe-

tition faced by Jhirmack products at re-

tail was intrabrand competition.

In support of these conclusions

plaintiffs refer in kaleidoscopic fashion

to facts showing the following:

(1) The prices of shampoos and con-

ditioners sold in salons have been higher

as a group than the prices of those sold

in OTC outlets, both at wholesale and at

retail.

(2) In the period extending through

1979, Jhirmack products were sold in salons

at prices substantially higher than the

prices at which diverted Jhirmack products

were sold in OTC outlets.

(3) Through 1979, Jhirmack tended

to set its suggested salon retail prices

-*,~" Se. eS «4

; Ra 3 "Ss

D-8

somewhat higher than those of two of its

competitors, Redken and KMS.

Plaintiffs’ argument is fallacious.

That salon brands may sell at higher prices

than OTC products and that Jhirmack pro-

ducts sold in salons may, due to a strong

consumer preference, command higher prices

than certain other shampoos and conditioners

and Jhirmack products sold at OTC outlets

does not prove the absence of interbrand

price competition, let alone that Jhirmack

has any power to raise prices in the market

for shampoo and conditioner.

The prices at which a product sells

is a function of supply and demand. That

a product is sold at a higher price than

other functionally interchangeable pro-

ducts is a reflection of the value that

the market attaches to that product when

sold in a particular volume - it is not

probative of the absence of price compe-

tition or of power to control price in

the market. Every manufacturer of course

hee

(NT Re ,

5 i“ 1

ote ie URES hOe ve

D-9

possesses power over the price at which he

sells his products but that is rot the po-

wer with which the antitrust laws are con-

cerned.

Based on the evidence at the earlier

trial, the Court previously found that

shampoos and conditioners were functionally

interchangeable, that the salon market

was not a distinct submarket, and that

price competition and price sensitivity

exists across the entire retail market

for shampoos and conditioners. (509 F.

Supp. at 375) In the lights of those

findings, and the record as a whole, no

jury could reasonably find that Jhirmack

is subject only to intrabrand competition

and possesses significant market power.

See Ron Tonkin Gran Turismo v. Fiat Dis-

tributors, 637 F.2d 1376, 1388 (9th Cir.

1981). Based on this record, the restric-

tions complained of must be held as a mat-

ter of law not to constitude an unreason-

able restraint of trade.

iL Ae) le a

D-10

2. Vertical Price Fixing

The JBL plaintiffs also assert a

vertical price fixing claim cognizable

as a per se violation. In substance, the

argument is that by controlling diversion

to discounting wholesalers and retailers,

Jhirmack stabilized and maintained resale

prices.

The evidence shows that Jhirmack

took steps to prevent diversion of its

products, frequently at the instance of

its distributors who complained when icon:

ducts appeared in other stores at dis-

count prices. There is no evidence,

however, that Jhirmaci. fixed the resale

prices for its products or enforced com-

pliance with a sgt kame price schedule.2/

Plaintiffs' argument is premised on

United States v. Bausch & Lomb Optical Co.,

321 U.S. 707 (1944), and United States v.

Arnold Schwinn & Co., 388 U.S. 365 (1967).

In Bausch & Lomb the defendant Soft-Lite

Lens Company, Inc., which distributed

D-11

lenses specifically manufactured for it by

Bausch & Lomb, required its distributors

to charge published list prices and its

retailers to sell at the prevailing local

prices. An elaborate system of control

and surveillance was used to enforce ad-

herence to this price-fixing scheme. This

price-fixing conduct was held to consti-

tute a per se violation. The Schwinn

case held vertical territory and customer

restraints upon the sale by distributors

of goods purchased by them from Schwinn

to be a per se violation. That holding

was overruled in Continental T.V. Inc.

v. GTE Sylvania Inc., 433 U.S. 36, 58

(1977), a case plaintiffs did not feel

it necessary to cite in this connection.

The undisputed facts show that the

restrictions in the JBL ‘case were non-

price restrictions. Jhirmack did not

establish or enforce resale prices.

Price and nonprice restrictions may ref-

D-12

lect the same motivation on the part of a

manufacturer, but they generate entirely

dirrerent economic consequences. Restric-

tions on price have a tendency to reduce

price competition, interbrand as well as

intrabrand. Restrictions on customers and

territory tend to restrict intrabrand com-

petition only and have the potential of

strengthening interbrand competition. This

reasoning led the Court in GTE Sylvania to

overrule Schwinn and reinstate the rule of

reason as the standard governing nonprice

vertical restrictions. 2/ Plaintiffs' con-

tention is wholly without merit and must

be rejected.

B. The Fraud Claim

Plaintiffs contend that Jhirmack made

fraudulent or negligent misrepresentations

in connection with the setting of minimum

purchase quotas. The distributor agree-

ment provided that distributors were re-

quired to purchase a minimum quantity of

products each month, the amounts being sub-

ject to change from time to time by Jhir-

mack. Appendix C to the agreement sets

D-13

forth the agreed minimum quantities and

the agreement states that the distributor

"acknowledges that the minimum purchase

requirements provided herein are fair,

just and reasonable." Plaintiffs contend

that the latter statement amounts to a

fraudulent representation by Jhirmack on

the theory that the specified quotas

were a representation as to the minimum

revenues that distributors could anti-

cipate.2/

It is doubtful that quotas incorpor-

ated into a distributors agreement afford

a basis for a later fraud: claim based on

the distributor's failure to attain them.

It is not necessary to reach that issue

here, however, inasmuch as plaintiff's

showing is in any event fatally defective.

Plaintiffs have failed to present facts

on two essential elements: that Jhirmack

made any representation negligently or

with intent to defraud, see Kelly Tire

D-14

Service, Inc., v. Kelly Springfield Tire

Co., 338 F.2d 248, (8th Cir. 1964); and

that plaintiffs acted in reliance on the

alleged representations.

Accordingly, Jhirmack is entitled

to summary judgment on the fraud claim.

II. The Booth Action

The Booth action was filed in February

1980, shortly after plaintiffs' distributor

agreements had been terminated. The pre-_

cipitating cause of the termination was

plaintiffs' refusal to execute new dis-

tributor agreements with Jhirmack. The

new form of agreement had been tendered by

Jhirmack to its distributors after it had

entered into an agreement with International

Playtex, Inc., ("Playtex"), appointing

Playtex as the exclusive distributor of

Jhirmack products to drug stores and other

OTC outlets.

The Booth complaint contains 49 pages

of rambling and often obscure recitals of

D-15

numerous grievances, cast mostly in argu-

mentative and conclusory language. It is

difficult to discern a cognizable anti-

trust violation or other cause of action.+/

The gravamen of the complaint, however,

appears to be the charge that Jhiruack

and Playtex entered into a conspiracy to

terminate plaintiffs in order to enable

Playtex to sell Jhirmack products to OTC

outlets, thereby depriving plaintiffs of

the exclusive territories granted under

the distributor agreements. (Comptaint:

pp. 5-7) In addition, these plaintiffs

assert certain related tort and contract

claims under state law.

In its prior ruling, the Court ob-

served that the charges made by the Booth

plaintiffs did not appear to set forth

injury of the type the antitrust laws

were intended to prevent. That observa-

tion was based not only on the complaint

but on the argument of Booth's counsel at

D-16

trial to the effect that the violation con-

sisted of the destruction of the distribu-

tors' exclusive distribution of Jhirmack

products by the entry of Playtex as a dis-

tributor to the OTC market. (509 F. Supp.

at 365-66)

Following issuance of the Court's

ruling on the market issues and defendants’

motions for summary judgment, these plain-

tiffs in their response for the first time

asserted a per se price fixing violation.

A. The Antitrust Claim

The argument which these plaintiffs

now advance in opposition to defendats'

motions for summary judgment is that the

Jhirmack-Playtex agreement is a per se vio-

lation of Section 1 because it is designed

to prevent distributors such as plaintiffs

from engaging in price competition in the

OTC market. The argument goes that Booth

was ready, willing and able to enter the

OTC market, that the new agreement with

D-17

Playtex assigned the OTC territory exclu-

sively to Playtex, that Booth's old dis-

tributor agreement was terminated when Booth

was unwilling to sign a new agreement re-

cognizing Playtex as the exclusive OTC dis-

tributor, and that these actions were

"price motivated" in that they were intended

to protect Playtex against price competi-

tion.

Viewing the evidence in the light most

favorable to plaintiffs, it shows that

Playtex secured the exclusive right to

distribute to the OTC market, that it was

concerned about the effect of diversion

by distributors on its volume and the

prices it could charge, and that it sought

to have Jhirmack stop such diversion.

Playtex's strategy was to price its pro-

ducts at relatively high levels compared

to other OTC prices and it was concerned

that diverting distributors could under-

sell it.

D-18

The Supreme Court has stated that the

per se rule applies only to "certain agree-

ments or practices" which are

so "plainly anticompetitive,"

National Society of Professional

Engineers v. United States,

435 U.S. 679, 692 (1978);

Continental T.V., Inc. v. GTE

Sylvania Inc., 433 U.S. 36,

_ 50 (1977), and so often "lack

- « »« any redeeming virtue,”

Northern Pac. R. Co. v. United

States, 356 U.S. 1, 5 (1958),

that they are conclusively pre-

sumed illegal without further

examination under the rule of

reason generally applied in

Sherman Act cases.

Broadcast Music, Inc. v. Columbia Broadcasting

System, Inc., 441 U.S. 1, 8 (1979). This is

the standard governing the analysis of the

Booth plaintiffs' claim of a per se viola-

tion based on an alleged conspiracy to re-

strain price competition.

The Court in Broadcast Music also

cautioned against automatic application

of the per se rule to any practice’ that

may relate to or affect price.

More generally, in characteriz-

ing this conduct under the per se

rule, out inquiry must focus on

= tn Se

D-19

whether the effect and, here

because it tends to show effect,

see United States v. United States

Gypsum Co., 438 U.S. 422, 436 n.

13 (1978), the purpose of the

practice are to threaten the pro-

per operation of our predominantly

free-market economy--that is,

whether the practice facially ap-

pears to be one that would always

or almost always tend to restrict

competition and decrease output,

and in what portion of the market,

or instead one designed to "in-

crease economic efficiency and to

render markets more, rather than

less, competitive.” Id., at 441

n. 16; See National Society of

Professional Engineers v. United

States, 435 U.S. at 688; Conti-

nental T.V., Inc. v. GTE Sylvania

Inc., 433 U.S., at 50 n. 16;

Northern Pac. R. Co. v. United

States, 356 U.S., at 4,

Finally, we have some doubt--

enough to counsel against ap-

plication of the per se rule-~

about the extent to which this

practice threatens the "“cen-

tral nervous system of the

economy," United States v.

Socony-Vacuum Oil Co., 310

U.S. 150, 226 n. 59 (1940),

that is, competitive pricing

as the free market's means of

allocating resources. Not all

arrangements among actual or

D-20

potential competitors that

have an impact on price are

per se violations of the

Sherman Act or even unreason-

able restraints. Mergers

among competitors eliminate

competition, including price

competition, but they are

not per se illegal, and many

of them withstand attack un-

der any existing antitrust

standard. Joint ventures

and other cooperative ar-

rangements are also not usu-

ally unlawful, at least not

as price-fixing schemes,

where the agreement on price

is necessary to market the

product at all.

441 U.S. at 19-20, 23.

The recent decision in Ron Tonkin Gran

Turismo, Inc. v. Fiat Distributors, Inc.,

637 F.2d 1376 (9th Cir. 1981), affirming

summary judgment for defendant, applies

this_reasoning to a closely analogous case.

Plaintiff, a foreign car dealer, complained

that defendant, a distributor of Fiat auto-

mobiles, had refused to appoint plaintiff

as a Fiat dealer pursuant to an agreement

with the existing Fiat dealer in the area.

Because Fiat's share of the relevant mar-

D-21

ket was insignificant, the issue was

whether defendants' conduct could be

held to be illegal per se. The lower

court had determined that Fiat's share

of total automobile registrations in

the area was less than 2% and that its

share of the foreign car market did not

exceed 5.2%. 637 F.2d at 1379.

The court observed that no evidence

had been offered to contradict the find-

ing that the product market was charac-

terized by vigorous interbrand competi-

tion which would not be affected by a

failure to increase intrabrand competi-

tion for a product with a very small

market share. 637 F.2d at 1387. The

Court also observed that "an important

factor” in defendant's decision not to

appoint plaintiff as an additional

dealer was "its desire to stimulate [an

existing distributor's] sales, i.e.,

its desire to promote interbrand compe-

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PO Ne Pay AEE PLEO, PEE AT eee Cag eee eT ee, Sa Ce LEME LIE Seer coms” ie

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D-22

tition.” Noting that the antitrust laws

are primarily concerned with interbrand

competition, and that the Sailive to in-

crease intrabrand competition by failing

to appoint plaintiff a dealer in the cir-

cumstances presented not only “was not

necessarily pernicious” but had the poten-

tial of benefitting competition by in-

creasing the sales of defendants, the

court determined that application of the

per se rule would be unjustified. 637

F.2d at 1387-88.

The reasoning of the court of appeals

is applicable here. As heretofore dis-

cussed, Jhirmack's share of the relevant

market is too insignificant for any re-

straint on intrabrand competition to have

a substantially adverse effect on inter-

brand competition. See Mutual Fund In-

- vestors v. Putnam Management Co., 553

F.2d 620, 627 (9th Cir. 1977). For

plaintiffs to recover, therefore, they

D-23

must come forward with evidence to show

that "the challenged conduct clearly had,

or was likely to have, a pernicious <a

fect on competition and lacked any re-

deeming virtue." Ron Tonkin, 637 F.2d.

at 1387.

The “conspiracy” under attack here

is the October 1979 agreement between

Jhirmack and Playtex appointing Playtex

the exclusive distributor of Jhirmack

products to OTC and other non-professional

outlets. Jhirmack's pxoducts had not

theretofore been officially distributed to

OTC outlets, having been generally limited

to professional outlets except for sporadic

diversion.

The primary effect of the Jhirmack-

Playtex agreement on competition in OTC

clianiete was to add the competitive ac-

tivity of a major distributor and to in-

crease the amount of Jhirmack products

available to consumers in OTC outlets.

D-24

On its face, therefore, the agreement

thus stood to enlarge trade and augment

competition with other brands of beauty

products. Moreover, the agreement also

provided a new source of intrabrand compe-

tition for Jhirmack products sold in sa-

lons.=/ Indeed, it was the threat of new

competition from OTC distribution of Jhir-

mack products which motivated the Booth

plaintiffs to file this action. £/

Defendants have demonstrated that the

challenged agreement was likely to promote

both interbrand competition and one kind

of intrabrand competition. The only ne-

gative effect plaintiffs point to is that

another potential kind of intrabrand com-

petition (by their entry into the OTC mar-

ket) was foreclosed. Even drawing all

reasonable inferences in favor of plain-

tiffs, it cannot be said that they have

presented significant probative evidence

that the Jhirmack-Playtex agreement

D-25

"clearly had, or was likely to have, a

pernicious effect on competition and

lacked any redeeming virtue." Ron Tonkin,

637 F.2d at 1387.

Plaintiffs seek. to equate this case

with Cernuto, Inc. v. United Cabinet Corp.,

595 F.2d 164 (3d Cir. 1979). There the

plaintiff, a dealer in kitchen cabinets,

was terminated by the manufacturer a few

month after it had become a dealer follow-

ing a complaint by a competing dealer to

the manufacturer that the plaintiff was.

discounting cabinets. On appeal from the

trial court's grant of summary judgment

for defendants, the court stated the issue

to be

whether the conduct at issue

here--a manufacturer deliber-

ately withdrawing its product

from a distributor that re-

sold it for a price less than

its competitors at the re-

quest of a competitor--should

be classified as a per se

violation of the Act. Fol-

lowing Justice Black's formu-

lation, the activity under

consideration in this case

aes

D-26

must be seen to have a

pernicious effect on com-

petition without having any

redeeming virtue. The per-

nicious effect is apparent:

one competitor has succeeded

in excluding another from

dealing in United cabinets

through a combination with

United and its agent, and,

in so doing, has eliminated

the possibility of price

competition by the fore-

closed dealer.

595 F.2d at 166. See Northern Pacific

Railroad Co. v. United States, 356 U.S. l,

5 (1958).

The Cernuto court noted that the per

se rule has not been applied to unilateral

decisions by a manufacturer in "arranging

its distribution structure," observing, as

an example, that it is "[neither]) uncommon

- « - {nor] illegal for a manufacturer to

enter into contracts that provide particu-

lar customers exclusive rights to sell the

product in designated geographical areas,"

595 F.2d at 167. The court found the

conduct alleged in that case to be dis-

tinguishable from generally accepted

D-27

manufacturers’ practices in two ways:

_first, because the manufacturer allegedly

did not act on its own to pursue its own

marketing strategy to compete with other

manufacturers, and second, because the

conspiracy was alleged to be motivated

by price considerations. The relevance

of the first factor is that action taken

by the manufacturer at the instance of

its customers results in restraints pri-

marily horizontal in nature, tending to

suppress competition between its custo-

mers. The relevance of the second is

that action having the purpose and effect

of restraining price movement and the

free play of market forces is illegal per.

se. 595 F.2d at 168-69. See also Contrac-

tor Utility Sales v. Certain-Teed Products,

638 F.2d 1061, 1072 (7th Cir. 1981).

As authority for application of a per

se rule, Cernuto is distinguishable. First,

the nature of the termination alleged here

oe.

Saas

Pea, rs ' SOON aa

yet Pha ,

met ; ,

D-28

is different from that giving rise to

the per se analysis in Cernuto. This

is not a case of terminating a dis-

counter. Plaintiffs do not allege

that any of them sold at discounted

prices or sold to OTC outlets at all,

or that they had made any preparations

to do, or that they had been identi-

fied by defendants as likely discount-

ers. What happened to plaintiffs did

not happen because of anything they

had done, in contrast to the facts

alleged in Cernuto.

Nor were plaintiffs' distribu-

torships simply taken away as in

Cernuto. Plaintiffs were offered

revised distributorship «greements

confirming them as exclusive dis-

tributors to the customers they had.

Meo Sar at

Tg Ae of : Mak* iy

0! ae ee ene i Pe Sy peg ekki) ye. 5 Pa Kg Sy ee a ii CO Sh aa “3

POR OMB wi erty SECTOR Nga 4 Aor ee Be ie NR aR

D-29

Plaintiffs found these contracts

substantially less desirable and

refused to sign them. It was only

after plaintiffs refused to sign

that Jhirmack terminated them.

Plaintiffs here faced a situation

similar to that in Contractor Uti-

lity Sales v. Certain-Teed Products,

638 F.2d 1061, 1071-73 & n. 9 (7th

Cir. 1981). There plaintiff argued

that defendant's actions towards

plaintiff during a certain period

were "similar, in terms of anti-

competitive effects, to the termina-

tion of an existing dealer," and

should receive the same per se

analysis. The court, however, stated

that while defendant's conduct "may

have reduced [plaintiff's] sales

volume and produced unacceptable

anticompetitive effects," the ab-

BP al Ro oh uN AMS oR Ys foie A a he RO ial 3

D-30

sence of a “complete termination"

precluded application of per se

analysis based on the rule in

Cernuto. The per se analysis in

Cernuto is inappropriate here for

the same reason.

Second, the termination here

did not have the "pernicious" effect

on competition as did the termina-

tion in Cernuto. There the net

result of the termination was one

less distributor and one less

source of intrabrand price competi-

tion. In this case, as discussed

above, the Jhirmack-Playtex agree-

ment has substantial pro-competitive

aspects and could not be called

nJ/ Inasmuch as the anti-

"pernicious.

trust claim asserted is limited to a

per se violation, summary judgment

must be granted.

+, »%

ae . ‘ ‘ Or ‘

. a d \ yi . . Oia ? nf . S ¢ 1 An i>

Pree 7 ere ‘ OM Beant) Pe bE oe eee MR a ed eer

D-31

B. The Tort Claims

Breach of Covenant of

Good Faith and Fair Dealing

Plaintiffs premise their claim for

breach of a covenant of good faith and

fair dealing on the assertion that "Jhir-

mach terminated plaintiffs for refusing

to accede to its illegal agreement with

Playtex." (Memo., p. 30.) In light of

the preceding disposition of plaintiff's

antitrust claim, this claim necessarily

fails.

Inducing Breach of Contract

Plaintiffs complain that Playtex

tortiously induced Jhirmack to breach

its contract with existing distributors

in two ways: by appointing Playtex as an

additional distributor, and by subsequent-

ly barring existing distributors from

any part of the OTC trade. To recover on

this claim plaintiffs must prove (1) that

a valid contract existed; (2) that Playtex

D-32

had knowledge of the contract and in-

tended to induce its breach; (3) that the

contract was in fact breached by Jhirmack;

(4) that such breach was proximately

caused by Playtex's unjustified and wrong-

ful conduct; and (5) that as a result

plaintiffs suffered damage. Richardson v.

La Rancherita La Jolla, Inc., 98 Cal.App.3d

73, 80, 159 Cal.Rptr. 285 (1980).

Plaintiffs' evidence is insufficient

to withstand summary judgment on this claim.

Defendants' uncontradicted evidence shows

that Jhirmack made its decision to engage

a new distributor for the OTC trade before

Playtex knew of this plan. The alleged

breach therefore could not have been prox-

imately caused by Playtex. Defendants also

show without contradiction that Playtex

‘understood that the existing agreements li-

mited existing distributors to salon cus-

tomers and that appointing an OTC distribu-

tor therefore would not breach the existing

D-33

distributor agreements. While the mean-

ing of the contract itself presents a

factual issue, as discussed below, defend-

ants' evidence thus suffices to show that

Playtex did not intend to procure its al-

leged breach. Defendants are accordingly

entitled to summary judgment on this claim. |

Cc. The Contract Claim

Plaintiffs claim that their distributor

agreements granted them exclusive geogra-

phical territories and that Jhirmack

breached the agreement when it appointed

Playtex as its OTC distributor for the en-

tire country in October 1979. The dispute

centers on the following paragraph of the

distributor agreement:

1. TERRITORY. PRODUCER

hereby grants to the DIS-

TRIBUTOR the exclusive and

non-transferable license to

market and to promote sales

of PRODUCER'S products.

DISTRIBUTOR shall be pri-

marily responsible for

selling PRODUCER'S products

to beauty salons, the owners,

operators, and apprentices;

beauty schools, the owners,

D-34

teachers and udents;

barber schools,\the owners,

teachers and students; men's

hairstyling establishments;

barber shops, the owners,

barbers and apprentices, in

and throughout the area des-

cribed in Exhibit "A" attached

hereto and incorporated here-

in by reference. (This area

shall be hereinafter referred

to as the "territory").

DISTRIBUTOR shall exclusively

devote its entire time and

use its best efforts to ex-

ploit, promote and sell

PRODUCER'S products to said

customers within the terri-

tory. The license granted

to DISTRIBUTOR is an exclu-

sive licence in that the

PRODUCER will not appoint

another distributor within

the territory.

Exhibit A attached to each agreement spe-

cifies a georgraphical [sic] area, such

as "The entire state of Utah."

Defendants argue that the distributor

agreement defined the distributors' ter-

ritories to exclude the OTC market, so

that in appointing Playtex as its OTC

distributor Jhirmack did not violate the

promise of exclusivity. In support of

this argument, defendants refer to the

D-35

language quoted above which specifies

that the distributor isto "exclusively

devote its entire time" to selling

Jhirmack products to beauty salons and

other customers in the professional

salon trade. Defendants contend that

the definition of territory contained in

the agreement means merely that Jhirmack

could not appoint another distributor to

service the same class of professional cus-

tomers in a given area.

In opposition, the Booth plaintiffs

argue that the agreement's promise of ex-

clusivity pertains to the entire geogra-

phical area described in Exhibit A of

each agreement. Under this interpreta-

tion, Jhirmack's appointment of a dis-

tributor like Playtex to service OTC out-

lets within those geographical areas

would violate the agreement not to appoint

another distributor in the territory, re-

gardless of whether the agreement enabled

D-36

the distributors themselves to sell to

OTC outlets.

These conflicting interpretations

of the exclusive territory clause raise

factual issues requiring a trial on the

contract claim.

Alternatively, defendants move for

judgment on the contract claim on the

ground that enforcement of the

distributor agreement to prohibit sales

of Jhirmack products to OTC outlets

would be contrary to law and public

policy. It is true that in the earlier

trial in this case the Booth plaintiffs

appeared to suggest such an interpreta-

tion of the agreement. Plaintiffs' pre-

sent position, however, is that their

agreement did not prohibit Jhirmack from

marketing its products in OTC channels

but merely required that if sneh-naxketing

were to be undertaken, it would have to

be through Jhirmack's existing distributors.

D-37

So stated, the purpose of the agreement

cannot be said to offend law or public

policy.

Defendants further contend that the

Booth plaintiffs' contract claim is barred

by the limitations period contained in

the distributor agreement. Section 9

of the agreement provides that "no actions

+ « « May be brought by Producer, or

Distributor, against each other, arising

out of or relating to this Agreement more

than thirty (30) days after a cause of

action occurs."

Plaintiffs argue, however, that the

distributor agreement is a “contract for

sale" within the meaning of California

Commerical Code Section 2725, which pro-

vides that the parties to such a contract

may not reduce the period of limitation

to less than one year .2/ If plaintiffs

are correct, the 30 day limitation period

contained in the contract is not enforce-

D-38

able. The issue turns, then, on the

characterization of the distributor

agreement.

According to Commercial Code Sec-

tion 2106, the term "contract for sale”

“includes both a present sale of goods

and a contract to sell goods at a future

time." Section 6 of the distributor

agreement states that it "constitutes

the entire understanding and agreement

between the parties with respect to the

sale of Producer's products." Section

2 provides that "(t]he Distributor shall

purchase Producer's products ... at

prices scheduled on the Producer's price

list," which "Producer, in its sole opi-

nion, may change from time to time.” A

price list is attached as an exhibit to

the agreement. Section 3 requires monthly

minimum purchase requirements, set forth in

detail in an exhibit appended to the agree-

ment.

D-39

Thus the distributor agreement com-

mits the distributor to purchasing mini-

mum amounts of Jhirmack products within

certain fixed periods, and defines the

terms and conditions for those purchases,

While the agreement contains terms not

relating strictly to sales, its purpose

and effect is clearly to provide for the

sale of goods by Jhirmack to its distribu-

tors. The distributor agreement is there-

fore a contract to sell goods at a future

time and hence a "contract for sale" with-

in the meaning of Commercial Code §§ 2106

and 2725. See Hachten v. Stewart, 42 Cal.

App.3d Supp. 1, 116 Cal.Rptr.631 (1974)

(gasoline dealer's contract); Steiner v.

Mobil Oil Corp., 20 Cal. 3d 90, 98, 141

Cal.Rptr. 157 (1977) (gasoline dealer's

contract); Warner Motors, Inc. v. Chrysler

Motors Corp., 5 U.C.C.Rep.Serv. 365 (E.D.

Pa. 1968) (automobile dealership agree-

ment). Under §2725, the 30 day limitation

D-40

period provided in the contract is unen-

forceable, and does not bar plaintiffs'

breach of contract claim.2/

If at the trial it is found that

Jhirmack breached its contract with plain-

tiffs by appointing Playtex as its OTC

distributor in October 1979, the issue of

the proper measure of damages will arise.

The agreement entitled either party to

terminate on 30 days' written notice.

Jhirmack gave plaintiff written notice

of termination in December 1979, and

plaintiffs do not contend that the no-

tice of termination was not effective.

Plaintiffs' damage claim would therefore

be limited to lost profits during the

period from the date of the alleged

breach (October 1979) to the effective

date of the termination (January 1980).

ORDER

1. Summary judgment is granted in

favor of defendant Jhirmack Enterprises,

D-41

Inc. in action C-78-1227, defendant to

recover costs.

2. Summary judgment is granted in

favor of defendants Redding, Schwartz,

Playtex, Smilow, and Esmark and against

plaintiffs on all claims in action C-80-

0249, defendants to recover costs,

3. Summary judgment is granted in

favor of defendant Jhirmack Enterprises,

Inc. on all claims in action C-80-0249

except the claim for breach of contract.

4. Further proceedings will be

governed by the following provisions:

a. The court will hold a pre-

trial conference on the re-

maining claim on Friday,

August 28, 1981, at 3 p.m.

b. Plaintiffs in action C-80-0249

are directed to serve and

file by August 21, 1981,

their pretrial statement

with respect to their con-

D-42

tract claim, setting forth

ii.

iii.

iv.

The name of each witness

to be called and a brief

summary of the testimony

to be given;

A Gescription of each ex-

hibit to be offered;

A detailed computation

of the damages claimed,

together with specific

references to the source

for each figure used in

the computation.

Any additional discovery

required for trial.

Jhirmack shall serve and file

by August 21, 1981, a pretrial

statement with respect to any

counterclaim it intends to

take to trial, conforming to

the preceding paragraph b.

D-43

d. Trial of all remaining claims

will begin on September 21,

1981, at 9:30 a.m.

IT IS SO ORDERED.

DATED: July 9, 1981.

/s/ William W. Schwarzer

WILLIAM W. SCHWARZER

United States District Judge

FOOTNOTES

i/ Plaintiffs' claim of resale price

maintenance has heretofore been dismissed.

Moreover, at the prior hearing, counsel

represented that no claim of a price-

fixing agreement was being made, (Tr. 1137)

and 19.

3/ See second amended complaint,

para. VIII, Ix.

4/ At oral argument counsel for these

plaintiffs advised that the only claims

now being asserted by them were a horizontal

price fixing claim under federal and state

antitrust laws, a claim against Jhirmack

for breach of the distributor agreement and

breach of a convenant of good faith, and a

claim against Playtex for inducing breach

of contract.

See 433 U.S. at 51-58, notes 18

3/ Another factor considered by the

court in Ron Tonkin was the motivation be-

hind the challenged conduct. Regarding

the negotiation of the Jhirmack-Playtex

agreement, Playtex General Counsel Joel

Coleman testified, "I knew that getting

an exclusive right to sell to the OTC

trade was essential to us... [the

effect of the agreement was to] grant

Playtex the rights that it needed."

(Dep. of July 25, 1980) Playtex evident-

ly considered the restriction complained

of necessary to achieve the procompeti-

tive results envisioned. As the court

said in Ron Tonkin, 637 F.2d at 1387,

"The courts have recognized the benefit

to encouraging the promotion of inter-

brand competition which occurs by allow-

ing a business to distribute its pro-

ducts in a particular fashion," citing

GTE Sylvania, 433 U.S. at 54.

D-45

8/ See 509 F. Supp at 365-66, note

3; complaint pp. 6-7.

z/ For the same reasons, other

authorities cited by plaintiffs are in-

apposite. See Alloy Int'l. Co. v.

Hoover=-NSK Bearing Co., Inc., 635 F.2d

1222 (7th Cir. 1980); Girardi v. Gates

Rubber Co. Sales Division, Inc., 325

F.2d 196 (9th Cir. 1963). United States

v. General Motors Corp., 384 U.S. 127

(1966), involved a conspiracy between

an association of Chevrolet dealers and

General Motors to force dealers to stop

selling to discounters by policing

their sales, forcing them to repurchase

cars and threatening termination.

8/ California Commercial Code

§ 2725 provides in relevant part:

(1) An action for breach of any

contract for sale must be commen-

ced within four years after the

cause of action has accrued. By

the original agreement the parties

may reduce the period of limita-

tion to not less than one year

but may not extend it.

9/ Jhirmack cites Hancock Oil Co.

v. McClellan, 135 Cal.App.2d 667 (1955),

which held a gasoline dealership con-

tract not to be a "contract of sale."

That case is distinguishable. First,

as the case preceded the adoption of

the Uniform Commercial Code in Califor-

nia, the court was not concerned with

the definition of "contract for sale"

in §2106, nor does the opinion contain

a cognate analysis. Second, the contract

in that case defined the terms of future

sales with much less precision than the

contract here; the court found it "too

uncertain to constitute a valid contract."

135 Cal.App.2d at 670.

APPENDIX E

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

Case No. C=-78=-1227 WWS

JBL ENTERPRISES, Inc., et al.,

Plaintiffs,

Vv.

JHIRMACK ENTERPRISES, INC.,

Defendant.

CONSOLODITED FOR LIMITED TRIAL WITH

Case No. C-80-0249 WWS

AL BOOTH, et al.,

Plaintiffs,

Vv.

JHIRMACK ENTERPRISES, INC., et al.,

Defendants.

FINDINGS OF FACT, CONCLUSIONS

OF LAW, AND MEMORANDUM OF

OPINION ON ISSUES OF RELEVANT

MARKET, MARKET SHARE AND

LAWFULNESS OF TYING ARRANGEMENT

William W. Schwarzer,

District Judge,

Presiding.

Filed February 25, 1981

FINDINGS OF FACT, CONCLUSIONS

OF LAW, AND MEMORANDUM OF

OPINION ON ISSUES OF RELEVANT

MARKET, MARKET SHARE AND

LAWFULNESS OF TYING ARRANGEMENT

I. PROCEDURAL BACKGROUND

JBL Enterprises, Inc,, et al. v, Jhirmack

Enterprises, Inc., C-78-1227-WWS, This action

is brought by three former distributors, JBL

Enterprises, Inc. (formerly doing business as

Jhirmack of Utah); Jean Robinson (formerly doing

business as Jhirmack of Idaho and Jhirmack of

Boise); and Lois Jean Million (formerly doing

business as Jhirmack of Indiana and Jhirmack of

North Central Indiana), against Jhirmack Enter-

prises, Inc. ("Jhirmack"), the manufacturer

of a line of beauty and cosmetic products

sold throughout the United States under the

name "Jhirmack" and formerly distributed by

plaintiffs.

The three plaintiffs allege that Jhir-

mack violated Sections 1 and 2 of the Sher-

man Act and Section 3 of the Clayton Act

by imposing unreasonable customer and ter-

E-2

ritorial restrictions, tying undesired

products to the right to purchase desired

products and to the right to use Jhirmack's

name, and wrongfully terminating distribu-

torships. Additional counts allege breach

of contract, fraud, negligent misrepresenta-

tion and interference with business.

Alfred Booth, et al. v. Jhirmack

Enterprises, Inc., et al., C-80-0249-WWS.

This action is brought by two former dis-

tributors of Jhirmack, Jhirmack of

Washington, D.C., Inc.; Thelma R. Bean

and Alfred Booth, respectively president

and vice president of Jhirmack of

Washington, D.C., Inc.; Jhirmack of

Southwestern Pennsylvania, Inc.; and

Walter Cecchini, president of Jhirmack

of Southwestern Pennsylvania, Inc.,

against Jhirmack; Mrs. Irene Redding,

president and chief executive officer of

Jhirmack; Albert L. Schwartz, Secretary-

Treasurer of Jhirmack; Gary McCord, vice

E-3

president of Jhirmack for marketing;

International Playtex, Inc. ("Playtex");

Joel E. Smilow, president of Playtex; and

Esmark, Inc., the parent corporation of

Playtex.

The Booth complaint alleges various

antitrust violations arising out of the

agreement between Jhirmack and Playtex

assigning to Playtex the exclusive rights

to distribute Jhirmack products nationally

to over-the-counter outlets. Plaintiffs

allege that the contract violates Section

1 of the Sherman Act, that Playtex and

Jhirmack have monopolized, conspired to

monopolize and attempted to monopolize

in violation of Section 2 of the Sherman

Act, that plaintiffs were wrongfully ter-

minated in violation of Section 3 of the

Clayton Act, that the option agreement

between Playtex and Jhirmack violates

Section 7 of the Clayton Act, and that

Jhirmack committed various other anti-

trust violations including tying and

E-4

territorial restrictions. The remaining

16 counts of the complaint, based on the

same facts, consist of counts of false

labelling and interference with the

Constitutional right of free association,

and various pendent state claims including

fraud, breach of contract, negligent and

intentional interference with contract,

intentional infliction of emotional

distress, etc.

On June 12, 1980, pursuant to Fed.R.

Civ.P. 42, the Court, with the consent of

the parties, consolidated the two actions

for a separate trial of all issues re-

garding (1) the relevant market, (2) de-

fendant Jhirmack's share of the relevant

market, and (3) whether Jhirmack insti-

tuted an unlawful tying arrangement as to

any of its products. See Pretrial Order

No. 1, a copy of which is attached as

Exhibit A. The Pretrial Order reserved

for later trial issues regarding justifi-

E-5

cation, causation, and damages for

any proven tying arrangement, and other

liability issues. On August 15 and

September 12, 1980, pretrial conferences

were held to discuss subsequent proceed-

ings.2/

Pursuant to the provisions of para-

graph 5 of the Pretrial Order, the parties

made written submissions before the trial.

Plaintiffs filed a joint trial brief, and

narrative written statements by James

Schilt, a financial analyst, on market

share, Gary McCord, former vice president

of marketing for defendant Jhirmack and

himself a named defendant who settled

with plaintiffs, on various marketing poli-

cies of Jhirmack; John Williams, president

of plaintiff JBL Enterprises, Inc., on his

company's experiences as a Jhirmack dis-

tributor; Walter Cecchini, plaintiff and

president of plaintiff Jhirmack of South-

western Pennsylvania, Inc., on his company's

E-6

experience as a Jhirmack distributor; and

Alfred Booth, plaintiff and vice president

of plaintiff Jhirmack of Washington, D.C.,

Inc., On his company's experience as a

Jhirmack distributor.

Defendant Jhirmack filed a brief, and

narrative written statements by Irene

Redding, president and chief executive of-

ficer of defendant Jhirmack and a named

defendant, regarding the relevant market

and tying issues; Dr. G. Stephen Jizmagian,

an economist, regarding the relevant market;

Rafael Akyuz, vice president for research

and development of defendant Jhirmack, on

flexibility of production in the beauty

and cosmetics industry; and Robert Cordell,

vice president for manufacturing of defend-

ant Jhirmack, on flexibility of production

in the beauty and cosmetics industry.

Defendant Playtex filed a brief, and

narrative written statements by Mark

Lowenthal, director of marketing for the

E-7

Family Products division of defendant

Playtex, on relevant market, Playtex's

marketing analysis and decisions, and the

effect of the Jhirmack-Playtex marketing

agreement on competition; and Dr. James

Carman, professor of business administra-

tion, on relevant market, Jhirmack's share

of the relevant market, and the effect of

the alleged restraint upon competition in

the relevant market.

On September 22, 23, 24, and 25, 1980,

and January 12, 1981, the relevant market,

market share, and tying issues were tried

to the Court. Mrs. Redding, Mr. McCord,

Mr. Schilt, Mr. Williams, Mr. Lowenthal,

Mr. Booth, Mr. Cecchini, Dr, Jizmagian,

and Dr. Carman appeared, their written

statements were received as exhibits and

they were examined and cross-examined by

counsel. The narrative written statements

of Mr. Akyuz and Mr. Cordell were received

as exhibits. Plaintiffs also called as a

E-8

witness John White, a beauty supply dis-

tributor and former sales manager and

distributor coordinator for defendant

Jhirmack. The parties have submitted

briefs and oral argument has been heard...

The ruling which follows constitutes the

Court's findings of fact and conclusions

of law on the foregoing bifurcated issues.

II. FACTUAL BACKGROUND

Defendant Jhirmack manufactures a line

of hair care and beauty products which are

distributed throughout the United States

by licensed distributors. The company was

founded in 1968 by Jheri Redding and his

wife Irene Redding. Jhirmack introduced

its first line of hair and beauty products

in 1972. Presently shampoos and condi-

tioners account for approximately 80% of

its production. Jhirmack initially ar-

ranged to market its products to consumers

exclusively through what are called profes-

sional outlets or the salon trade, con-

E-9

Sisting of beauty salons, barber shops,

hair styling establishments, beauty

schools, barber schools, and beauty sup-

ply houses. Jhirmack assigned geographic

areas to independent distributors, who

were required to devote their best efforts

to distribute Jhirmack products to profes-

Sional outlets.

Although Jhirmack initially manu-

factured its products for resale exclu-

Sively through professional outlets, some

of Jhirmack's products were "diverted" by

distributors for eventual resale to con-

sumers through other distributors and

other types of outlets, including discount

houses, drug, food, and department stores

(referred to as "over-the-counter" or

"OTC" outlets). Jhirmack received com-

plaints from salon owners and distributors

about instances of diversion to OTC out-

lets, and took steps to identify the dis-

tributors involved and to discourage this

at _ a) le

E-10

activity.

Since 1974, Jhirmack, relying on the

provision in the distributor agreements

obligating distributors to comply with

company policies asd procedures, has re-

quired its distributors to place an initial

order for a specified quantity of each new

product. Under this "new product quota"

program, Jhirmack calculated each distribu-

tor's quota based on the number of potential

professional accounts in that distributor's

territory. Jhirmack warned its distributors

that it would not fill orders which did not

include the new products required under the

quota program, and on occasion has rejected

orders for that reason.

In April 1978 Jhirmack cancelled the

distributorship of plaintiff JBL Enter-

prises, Inc. JBL had refused over a period

of several months to order certain new pro-

ducts as required under the quota program,

and had participated in diverting Jhirmack

E-11

products to OTC outlets,

On October 9, 1979, Jhirmack arranged

to market its products through OTC outlets

by appointing Playtex exclusive distribu-

tor of its products "for all channels of

trade excluding the professional salon

trade." The agreement obligated Playtex

to make certain expenditures for promo-

tion and advertising of its Jhirmack

products. Playtex presently distributes

seven Jhirmack iment and conditioner

products, including two shampoos and four

conditioners known as the "Basic Six"

(E.F.A. Shampoo, Gelave Shampoo, Moisture-

pHlex Conditioner, pHinale Conditioner,

N.C.A. Conditioner, and NutriPak Condi-

tioner). These six products accounted for

approximately 67 to 68% of Jhirmack's sales

in 1977, 1978, and 1979.

Following the execution of the mar-

keting agreement with Playtex, Jhirmack

sent new distributorship agreements to its

E-12

existing distributors under which they were

to continue the exclusive distribution of

Thirmack products through professional out-

lets but with the understanding that Playtex

would soon begin operating as exclusive dis-

tributor of Jhirmack products to OTC outlets.

The Booth plaintiffs are former Jhirmack

distributors who were offered the revised

distributorship contracts at that time but

refused to sign them. Jhirmack terminated

those plaintiffs' distributorships in

December 1979.

This opinion addresses two issues:

(1) What is the relevant market for

the purpose of determining whether the res-

traints allegedly imposed by Jhirmack on

its distributors' selling outside of their

territory and to purchasers other than pro-

fessional or salon outlets, and the alleged

tying arrangements, could be found to have

an impact on competition; and

(2) Does Jhirmack's new product quota,

requiring its distributors to place an ini-

E-13

tial order for each new product, consti-

tute an unlawful tying agreement.

Part III of the opinion will deal with

the first issue, part IV with the second.

III. THE ALLEGED RESTRAINTS ON CUSTOMERS

AND TERRITORY-RELEVANT MARKET

For purposes of this opinion, the

Court accepts the allegations of the com-

plaints to the effect that Jhirmack imposed

customer and territorial restrictions on

the sale of its products by its distributors.

Those restrictions are alleged to be unreason-

able restraints of trade .2/

Under the rule of reason analysis,

plaintiffs must demonstrate that defendant's

alleged conduct had an impact on competition

in the relevant market. In DeVoto v. Pacific

Fid. Life Ins. Co., 618 F.2d 1340, 1344-45

(9th Cir.), cert. denied, 101 S.Ct. 206

(1980), the Ninth Circuit stated the control-

ling principles as follows:

A crucial aspect of a plain-

tiff's case under the rule of

E-14

reason is a demonstration

that the alleged conduct of

the defendant had some mar-

ket impact. See Times-

Picayune Publishing Co. v.

United States, 345 U.S. 594,

615, 73 S.Ct. 872, 883-84,

97 L.Ed. 1277 (1953); As-

sociated Press v. United

States, 326 U.S. 1, 27, 65

S.Ct. 1416, 1428, 89 L.Ed.

2013 (1945) (Frankfurter, J.,

concurring); American Motor

Inns, Inc. v. Holiday Inns,

Inc., 521 F.2d 1230, 1247

(3d Cir. 1975). As this

court recently stated, "Un-

less the alleged anticompe-

titive conduct is per se un-

reasonable, the fact that

the conduct restrained trade

in a relevant market is an

essential part of a plain-

tiff's case . .. and the

burden of establishing it

lies on him." Gough v. -

Rossmoor Corp., 585 F.2d

381, 385 (9th Cir. 1978),

cert. denied, 440 U.S. 936,

99 S.Ct. 1280, 59 L.Ed.2d

494 (1979). This court and

others have repeatedly em-

phasized that "[t]he anti-

trust laws .. . were en-

acted for 'the protection of

competition, not competitors.'"

Brunswick Corp. v. Pueblo

Bow-O-Mat, Inc. [sic], 429 U.S. 477,

488, 97 S.Ct. 690, 697, 50 L.Ed.

2d 701 (1977) (quoted in Gough,

supra, 585 F.2d at 386) (empha-

Sis in original) (citation omit-

ted), and therefore the plain-

tiff must show something more

E-15

than simply an adverse

effect on his own business;

he must show "an adverse

impact on the competitive

conditions in general as

they exist within the field

of commerce in which the

plaintiff is engaged."

Gough, supra, 585 F.2d at

. Absent per se viola-

tion, competitive injuries

must be defined in terms

of a discrete market.

* * *

The Supreme Court has

stated that the appropriate

focus in determining rea-

sonableness under section

1 focuses on "the percent-

age of business controlled,

the strength of the re-

maining competition, [and]

whether the action springs

from business requirements

Or purpose to monopolize."

United States v. Columbia

Steel Co., 334 U.S. 495, 527,

68 S.Ct. 1107, 1124, 92 L.Ed.

1533 (1948) (quoted in Times-

Picayune Publishing Co. v.

United States, 345 U.S. 594,

615, 73 S.Ct. 872, 884, 97

L.Ed. 1277 (1953)).

The analysis must therefore begin with

a determination of the relevant market, i.e.,

"the field of commerce in which the plain-

tiff was engaged." Gough, 585 F.2d at 389.

E-16

The burden of proving the relevant

market rests on plaintiff. Id., 585 F.2d

at 385. At the trial plaintiffs undertook

to prove a relevant market comprising sales

of shampoos and conditioners at retail by

beauty salons and professional outlets.

The Court rejects the market proposed

by plaintiffs for two separate and indepen-

dent reasons:

(1) It does not comprise the field

of commerce in which plaintiffs

are engaged;

(2) It does not constitute a dis-

tinct submarket within the

market comprising the sale of

shampoos and conditioners to

consumers.

In the discussion which follows, the

Court will analyze the evidence bearing

on each of the foregoing propositions.

Before doing so, however, a threshold is-

sue must be addressed with respect to the

E-17

Booth action: whether the injury complained

of is cognizable antitrust injury.

A. The Booth Action Does Not Allege Injury

Cognizable Under the Antitrust Laws.

Section 4 of the Clayton Act (15 U.S.C.

§ 15) permits recovery of damages under the

antitrust laws by "[a]ny person who shall be

injured in his business or property by

reason of anything forbidden in the anti-

trust laws ..." To recover damages plain-

tiff "must prove antitrust injury, which is

to say injury of the type the antitrust laws

were intended to prevent and that flows

from that which makes defendants' acts unlaw-

ful." Brunswick Corp. v. Pueblo Bowl-O-Mat,

Inc., 429 U.S. 477, 489 (1977) (emphasis in

original). As the Ninth Circuit stated in

Cal. Computer Products v. Intern, Business

Machines, 613 F.2d 727, 732 (9th Cir. 1979):

Satisfying the latter burden

is dependent on a showing that

the injury was caused by a

reduction, rather than an

increase, in competition

flowing from the defendant's

acts, since "[t])he antitrust

E-18

laws .. . were enacted for

‘the protection of competition

not competitors,'”" Brunswick

Corp. v. Pueblo Bowl-O-Mat,

Inc., 429 U.S. at 488, 97 S.Ct.

at 697, quoting Brown Shoe Co.

v. United States, 370 U.S. 294

320, 82 S.Ct. 1502, 8 L.Ed.2d

510 (1962). See Oreck Corp v.

Whirlpool Corp., 579 F.2d 126,

133 (2d Cir. 1978). Accordingly,

the plaintiff must demonstrate

that the defendant's conduct was

intended to or did have some

anticompetitive effect beyond

his own loss of business or the

market's loss of a competitor.

The Booth action appears to have been

initiated in total disregard for these clear

and settled principles. The substance of

the complaint's charging allegations is con-

tained in paragraph 17, which states in

relevant part that

fAefendants Jhirmack, Redding,

Schwartz, McCord, and each of

them, have engaged in agree-

ments, combinations, and con-

spiracies with defendants Play-

tex, Smilow, Esmark, and other

unnamed co-conspirators, and

each of them, to unlawfully

restrain the aforesaid trade

and commerce in violation of

Section 1 of the Sherman Act,

and have specifically entered

into a marketing agreement

which would grant defendants

E-19

Playtex, and each of them, [sic]

a license to sell the

Jhirmack products to re-

tailers; have attempted to

monopolize, have monopolized,

and will continue to mono-

polize, and have combined

and conspired to monopolize,

the aforesaid trade and com-

merce in violation of Section

2 of the Sherman Act by wrong-

fully terminating without

cause the Distributor Agree-

ments of plaintiffs, and each

of them, in order to allow

defendants Playtex, Smilow,

Esmark, unnamed conspirators,

and each of them, to enter

the territory of plaintiffs

and to market said Jhirmack

products over-the-counter in

retail stores, thereby com-

peting unfairly and substan-

tially lessening competition

and tending to create a mono-

poly in the aforesaid trade

and commerce in violation of

Section 3 of the Clayton Act.

Paragraph 18 enlarges on these allega-

tions, complaining that because of Jhirmack's

agreement with Playtex, providing for the

distribution of Jhirmack products by

Playtex through OTC channels in addition to

the existing distribution to professional

outlets by Jhirmack's own distributors,

E-20

plaintiffs lost the exclusive terri-

tories and markets they had developed

in the salon trade.

These allegations on their face do not

state a claim actionable under the antitrust

laws .2/ Even if, as the Booth plaintiffs

claim, their ability to sell Jhirmack pro-

ducts to salons has been injured by Playtex's

distribution of Jhirmack shampoos and condi-

tioners to OTC outlets, given the preference

of salons to sell brands having no OTC dis-

tribution, that injury results from an in-

crease in competition, not a restraint on

competition. The antitrust laws are intended

to protect competition, not individual com-

petitors. Janich Bros., Inc. v. American

Distilling Co., 570 F.2d 848, 855 (9th Cir.

1977), cert. denied, 439 U.S. 829 (1978).

Regardless of the outcome of the relevant

market analysis, the Booth plaintiffs would

be precluded from recovering for injury to

their businesses for failure to show anti-

E-21

trust injury under Brunswick. See BBD

Transportation Co. v. Southern Pacific

Transportation Co., 627 F.2d 170, 172

(9th Cir 1980); Murphy Tugboat Co. v.

Crowley, 454 F.Supp. 847, 852 (N.D. Cal,

1978) (on appeal). This matter will be

considered in further proceedings as pro-

vided below.

Apart from the foregoing defect,

however, the Booth action would be governed

by the same relevant market analysis as the

other actions discussed in the following

sections.

B. The Relevant Market Comprises the Sale

of Beauty Products to Professional

Outlets. 4/

Under Gough v. Rossmoor Corp., the rele-

vant market consists of the field of com-

. Merce in which plaintiff is engaged. 585

F.2d at 389. The initial step in the rule

of reason analysis must be the "consideration

of the impact of the restraint on the compe-

titive conditions within the field of commerce

E-22

in which the plaintiff was engaged."

Id. }

Plaintiffs were engaged in the dis-

tribution and sale of beauty products, prin-

cipally but not exclusively shampoos and

conditioners, to beauty salons and other

types of professional outlets. The alleged

restraints affected plaintiffs in the whole-

sale distribution of Jhirmack products.

Thus, JBL's first amended complaint alleges

that plaintiffs' distributorship agreements

with defendant Jhirmack were "subject to

unreasonable territorial and customer res-

traints, thereby precluding its distribu-

tors from free and unrestricted competition."

(p.4) The customer restraint alleged was

the specification in the distributorship

agreement that distributors were to sell

Jhirmack products to beauty salons, beauty

schools, barber schools, and men's hairstyl-

ing establishments. Plaintiffs complain that

they were not allowed to sell ghirmack pro-

E-23

ducts to other distributors, This res-

triction had the effect of "eliminating

the discounting of defendant's products

by distributors, subdistributors, beauty

and barber supply houses, cash-and-carry

stores, salons, discount houses, drug

stores and other entities . .. thereby

precluding its distributors and other

sellers of the products from free and un-

restricted competition." (p.4) Even if

the effects of any restraint may have been

felt throughout the chain of distribution,

the impact of the alleged territorial and

customer restrictions fell upon plaintiffs

in their sales to professional outlets.

The distribution of shampoos and

conditioners, and other beauty products

as well, occurs through several channels,

as the following diagram shows:

" 4 My

t Serler ant Beauty Salon

Distributors Supply Hones oe Distributors

‘. ° ’

. .

Me J

Independent Inteqrated

Wholesslers Wholesalers

Ar '

ae \

¢ “i 4 .

> ‘

¢ , ‘

Phe n

Noor to-door Oaper vrent foot Ong mes Salons, Shops,

Salespersons} Stores Stores Stores terchwndisers Schools

CONSUMERS

(Def. Ex. IPT -B)

v7-a

E-25

Plaintiffs, at least according to the

position they have taken in this trial,

sell only to salon and other professional

outlets. That field of commerce is distinct

from other channels of distribution. Plain-

tiffs compete with other so-called single

line distributors, i.e., distributors car-

rying the products of only a single manu-

facturer. They also compete wich barber and

beauty supply houses, or jobbers, which

carry a number of different lines for dis-

tribution to the professional trade. Fi-

nally they compete to a minor extent with

those manufacturers who sell directly to

the professional trade.

The relevant market in which plaintiffs

compete - and in which the impact of any

restrictive practice must be evaluated -

is therefore the market for the sale of

relevant products to the professional trade.

See Tire Sales Corp. v. Cities Service Oil

Co., 410 F.Supp. 1222 (N.D. Ill. 1976) (rele-

E-26

vant market defined as sales of tires,

batteries and accessories to service sta-

tions and other retail outlets in South

Chicago); South End Oil Co. v, Texaco,

Inc., 237 F.Supp. 650 (N.D. 111.1965) (rele-

vant market consisted of discount houses

and other retailers to which plaintiff

sold).

Plaintiffs contend that the relevant

products must be limited to shampoos and

.conditioners. They argue that shampoos and

conditioners represent about 80% of Jhir-

mack's sales, and that the Playtex arrasee-

ment for OTC distribution applies only to

shampoos and conditioners.= Plaintiffs

rely on the general principle that the

relevant product market consists of “those

commodities reasonably interchangeable by

consumers for the same purpose." United

States v. E.I. du Pont & Co,, 351 U.S. 377,

395 (1956).

The principle of reasonable inter-

E-27

changeability must, however, be applied

with reference to the specific market in-

volved. While shampoo and lipstick are,

of course, not interchangeable for the

end user of the product, the relevant

market here is not the sale to the end

user but the sale to professional outlets.

The evidence establishes that professional

outlets, as well as the manufacturers and

distributors who. serve them, tend to deal

in the entire range of beauty products.

Professional outlets purchase full lines

of beauty products from their suppliers,

including shampoo, hair conditioner, hair

spray, hair color, permanents, skin care

products, cosmetics, and fragrances.£/

Sellers at the several levels of distribution

compete on the basis of manufacturers’

brands or lines spanning the beauty products

field. The ten largest manufacturers selling

to the salon trade produce cosmetics as

well as hair products, and six of those

E-28

ten also produce fragrances. Manufacturers

like Jhirmack have been introducing more

cosmetic products to fill out their lines,

taking advantage of brand loyalty carrying

over from one category of beauty products

to another. Revlon, for example, has bene-

fited in the sale of hair products from its

reputation as a manufacturer of cosmetics.

As one witness put it, "It's part of the

business to have a full line." Jhirmack

itself sells shampoo, conditioner, hair

color, permanents, skin care products, cos-

metics, and fragrances. At the wholesale

level both types of salon distributor,

beauty supply houses and single line dis-

tributors, handle the entire range of

beauty products. Single line distributors

carry a single manufacturer's line; beauty

supply houses the lines of a number of manu-

facturers. Thus not only Jhirmack distribu-

tors but their competitors carry full lines

of beauty products, as do their customers

at the retail level.

E-29

In arguing that the relevant market

must be limited to shampoos and conditioners,

plaintiffs also rely on United States v.

Bethlehem Steel Corp., 168 F.Supp. 576

(S.D.N.Y. 1958), and Crown Zellerbach Corp.

v. F.T.C., 296 F,2d 800 (9th Cir. 1961),

cert. denied, 370 U.S. 937 (1962). In

Bethlehem Steel the United States sought

to enjoin a merger of the second and sixth

largest steel corporations. Defendants con-

tended that a number of distinct finished

steel products manufactured by the two com-

panies constituted a single relevant line

of commerce because steel producers had the

capacity to allocate ingot supply among

finishing facilities according to demand.

The Court rejected this production flexi-

bility argument, finding that in practice

"steel producers have not been quick to

shift from product to product in response

to demand. Moreover, the evidence estab-

lishes that the continuing relationships

E-30

between buyers and sellers in the steel

industry make such shifts unlikely."

168 F. Supp at 592.

In Crown Zellerbach the Ninth Circuit

reviewed an order of the Federal Trade Com-

mission directing Crown Zellerbach to di-

vest itself of a smaller paper company

which it had acquired. Crown Zellerbdch

argued that production flexibility created

a relevant product market consisting of all

the types of paper which standard paper-

making machinery could be adapted to pro-

duce. The court rejected the production

felxibility argument, citing Bethlehem

Steel and saying that "[w]hat was turned

out of the Fourdrinier machines depended

altogether on what orders [the acquired

company] had and what it knew it could

sell. What those orders were and what it

found a market for were presumably the pro-

ducts which it did sell." 296 F,2d at 812.

In the instant case, however, it is

E-31

not the manufacturers' production flexi-

bility that supports treating salon beauty

products as a single line of commerce con-

stituting the relevant market. Rather it is

the way in which these articles move at the

wholesale level and compete as a single

line of products. Lipstick, for example,

although having a different end use from

shampoos, is made by the same manufacturers

and distributed to salons as a part of a

line which includes shampoo. A similar

product market comprehending a range of

distinct products was found in A.G. Spalding

& Bros., Inc. v. F.T.C., 301 F.2d 585, 604

(34 Cir 1962), aff'g 56 F.T.C. 1155. There

the court found higher priced athletic goods

to be a relevant market where the largest

manufacturers each made a full line of

goods and each grouped its line of products

together for promotion and distribution.

See United States v. Philadelphia National

Bank, 374 U.S. 321, 356 (1963) (relevant

E-32

product market defined as "cluster" of

products and services provided by commer-

cial banks); United States v. Phillipsburg

National Bank & Trust Co., 399 U.S. 350, 360

(1970) (same product market as in Phila-

delphia National Bank); United States v.

Grinnell, 384 U.S. 563, 573 (1966) (rele-

vant product market defined as cluster of

accredited central station alarm services);

United States v. Hughes Tool Co., 415 F.

Supp. 637, 641 (C.D. Cal 1976) (relevant

product market defined as "cluster of spe-

cialized surface rotary drilling tools").

The evidence, therefore, compels

a finding that for purposes of these ac-

tions the relevant market comprises the

sale of beauty products, including but

not limited to shampoos and conditioners,

to beauty salons and other professional

outlets. Plaintiffs have produced no data

to reflect the share of that market held

by Jhirmack, or Jhirmack products. The

E-33

evidence in the record does, however,

permit the Court to arrive at an approx-

imation sufficient to support a finding.

Initially, it must be noted that none

of the market share data in the record

inspire confidence. They come either from

industry publications, which do not dis-

close the methods used in their compila-

tion and are not subject to verification,

or from the Department of Commerce's

Census of Manufacturers, whose categories

are so broad and vaguely defined that the

specific products at issue here could have

been reported by manufacturers in any of

several different statistical categories.

The figures are nevertheless acceptable for

present purposes inasmuch as both sides rely

on them and the results they show are so

decisive that there is no reason to believe

that accounting or reporting differences

would affect them. These figures show that

manufacturers' shipments of beauty products

E-34

for retail and professional use in the

salon trade totalled approximately $398.9

million in 1976, $434.6 million in 1977,

and $483.4 million in 1978. Jhirmack's

factory sales are estimated by defendants

to be approximately $9.0 million in 1976,

$13.9 million in 1977, and $20.1 million

in 1978, resulting in a market share of

beauty products of 2.3% in 1976, 3.2% in

1977, and 4.2% in 1978. If all manufac-

turers' shipments of beauty products are

included, being potentially competitive in

the sale to professional outlets, Jhirmack's

share would decline to 0.3%.

Cc. The Sale of Shampoos and Conditioners

Through Professional Outlets Does Not

Constitute a Distinct Submarket.

Plaintiffs contend, however, that the

relevant market consists of the sale of

shampoos and conditioners to consumers for

home use, and that Jhirmack's market share

must be determined with reference to a dis-

tinct submarket limited to retail sales

E-35

through salons and other professional

outlets. For the reasons explained in the

foregoing section of this opinion, the Court

has found that the relevant market lies at

the wholesale level at which plaintiffs com-

pete, not at the retail level at which their

customers compete. However, inasmuch as

the parties have devoted substantial re-

sources to litigating this contention, and

in the interest of reaching a complete ad-

judication, the Court will proceed to

determine the question whether a submarket

as claimed can be found to exist here.

Plaintiffs, to sustain their submarket

theory, have to establish that the salon

submarket is

sufficiently distinct in

commercial reality to permit

a company that dominated [it]

to exclude competition and con-

trol prices. This depends on

whether efforts to exclude com-

petition or control prices in

the [submarket] in ques-

tion would be negated by a

shift of buyers to other por-

tions of the market. (cita-

tions omitted)

E-36

Greyhound Computer v. Intern. Business

Machines, 559 F.2d 488, 493 (9th Cir.

1977). In ILC Peripherals v. Intern.

Business Machines, 458 F. Supp 423, 428

(N.D. Cal. 1978), the court commented

that "(t]his inquiry boils down to

whether there are products that restrain

a defendant's ability to act without re-

gard for other manufacturers and sup-

pliers." Market definition has also

been characterized as "a process of des-

cribing those groups of producers which,

because of the similarity of their pro-

ducts, have the ability -- actual or

potential -- to take significant amounts

of business away from each other." Smith-

Kline Corp. v. Eli Lilly & Co., 575 F.2d

1056, 1063 (3d Cir. 1978). In United

States v. Empire Gas Corp., 537 F.2d

296, 303 (8th Cir. 1976), the court stated

"[w]hether a particular product's sales

constitute a relevant market or submarket

E-37

depends on the cross-elasticity of de-

mand for that product; in other words,

the readiness and ability of consumers

to turn to reasonable alternatives to

the product in question."

But plaintiffs' claim that the salon

market is distinct from the OTC market

and not an interchangeable source of sup-

ply for consumers runs head-on into their

contention that the alleged restraints by

defendants prevented them from diverting

their products (directly or indirectly)

to OTC outlets and "eliminat[ed] the dis-

counting of defendant's products by...

discount houses, drug stores and other

entities." Moveover, the gravamen of the

Booth complaint, and to a lesser extent

of the other actions, is that by al-

lowing its products to be sold by Play-

tex to OTC stores, Jhirmack exposed

plaintiffs' customers, the salons, to

direct competition in the sale of Jhirmack

E-38

products. In short, if two different

types of retail stores compete for the

patronage of consumers in the sale of

identical products (albeit at different

prices), it is difficult to sustain a

contention that, for antitrust purposes,

those stores are in distinct submarkets.

Nevertheless, plaintiffs contend that

the salon and professional trade constitutes

a distinct submarket, relying on Brown Shoe

Co. v. United States, 370 U.S. 294, 325

(1962), in which the Court said:

The outer boundaries of

a product market are determined

by the reasonable interchange-

ability of use or the cross-

elasticity of demand between

the product itself and substi-

tutes for it. However, within

this broad market, well-defined

submarkets may exist which, in

themselves, constitute product

markets for antitrust purposes.

United States v. E.I. du Pont

de Nemours & Co., 353 U.S. 586,

-95. The boundaries of such

a submarket may be determined

by examining such practical

indicia as industry or public

recognition of the submarket

as a separate economic entity,

the product's peculiar charac-

E-39

teristics and uses, unique

production facilities, dis-

tinct customers, distinct

prices, sensitivity to

price changes, and special-

ized vendors. (footnotes

omitted)

There the Supreme Court affirmed the trial

court's findings rejecting defendant's claims

of relevant submarkets of men's, women's

and children's shoes based on differences in

price, quality, and customer age and sex.

Although Brown Shoe was a merger case under

Section 7 of the Clayton Act, the decision

provides indicia generally applicable to

Section 1 and 2 cases. It must, however, be

applied with due regard for the observation

of the Ninth Circuit that

[t]hese indicia were listed

with the intention of furnishing

practical aids in identifying

zones of actual or potential

competition rather than with

the view that their presence

or absence would dispose, in

talismanic fashion, of the sub-

market issue. Whether or not

a court is justified in carving

out a submarket depends ulti-

mately on whether the factors

which distinguish one purported

E-40

submarket from another are

"economically significant"

in terms of the alleged

anticompetitive effect.

International T. & T. Corp. v. General T.

& E. Corp., 518 F.2d 913, 932 (9th Cir.

1975).

Before examining the evidence in light

of the Brown Shoe indicia, it is useful to

note what lies at the heart of plaintiff's

submarket contention and - for that matter -

at the heart of their lawsuits. The essence

of the entire controversy is that beauty

salons insist on carrying only shampoos,

conditioners and other beauty products which

are not generally available at OTC outlets.

There is abundant evidence that beauty salons

have discontinued buying certain brands --

including Jhirmack -- once the brands could

be purchased at drug and discount stores and

similar outlets. By their course of conduct,

therefore, salon operators have generally

prevented direct competition with OTC outlets

in the sale of particular brands and have

E-41

succeeded in maintaining a price range

for shampoos and conditioners generally

higher than that prevailing at OTC outlets.

A distinct submarket for shampoos and

conditioners does not come into existence,

however, simply because particular brands

may be distributed exclusively through

salon outlets. Moreover, it would be of-

fensive to the spirit of the antitrust

laws to permit plaintiffs to bottom their

antitrust claim on their customers' pursuit

of a patently anti-competitive practice.—/

Turning to plaintiffs' claim of a rele-

vant submarket limited to sales of shampoo

and conditioners through salons and other

professional outlets, the indicia set forth

in Brown Shoe must be applied to the evidence.

(1) Industry and Public Recognition

There is substantial evidence showing

that the salon trade maintains a distinctive

identity and seeks to promote a professional

image. It has its own associations and

E-42

publibcations. Many salons insist on

selling only shampoos and conditioners

which are not distributed in the OTC

trade. Manufacturers cater to salons

by producing shampoos and conditioners

specifically for them, trying to prevent

diversion of those products into OTC out-

lets, and designing products and packaging

that emphasize the importance of profes-

sional hair care and the professional pre-

scription of products for home use. Manu-

facturers like Jhirmack and Redken have de-

veloped extensive seminar programs to en-

able salon personnel to appear more expert

and to enhance the prestige of salons and

salon products. Some manufacturers produce

only for salons. Those that sell the same

products in both channels, such as Revlon,

use a separate division to sell to salons.

Other evidence shows, however, that OTC

shampoos and conditioners compete directly

with salon products, and that manufacturers

of salon brands consider themselves to be

in competition with the entire industry.8/

E-43

Various of the plaintiffs themselves tes-

tified that all manufacturers compete for

sales to consumers; that Jhirmack as a

salon brand was in competition with "“every-

thing that is sold," that "everyone sells

shampoos;" and that their hair care products

competed with products sold by Safeway. Al-

though salons compete as specialty shops,

holding out higher quality at higher prices,

they are considered by the industry to be

in competition for the same ultimate consumer

of shampoo for home use.

(2) Characteristics and Uses

Plaintiffs do not contend that salon

shampoos and conditioners have uses or pro-

perties not found in OTC products. All

shampoos and conditioners perform essentially

the same functions; while the many brands

available feature a diversity of ingredients,

there is no systematic difference between

salon products and OTC products. A success-

ful new product is soon imitated by other

E-44

brands in both the salon and OTC trades.

Plaintiffs contend, however, that consumers

perceive shampoos and conditioners sold

in salons to be superior to OTC products,

and that this perception substantially in-

sulates salons from the competition of the

broader market.

The evidence suggests that consumers

generally associate salon products with

superior quality. However, they do not ne-

cessarily associate professional character-

istics exclusively with salon products. Al-

though some customers value the endorsement

and sale by salons, others are influenced by

the promotion of a product as professionally

formulated and endorsed regardless of where

it is sold.

A number of brands in the salon trade

have been successfully marketed in the much

larger OTC trade on the strength of their

salon origins and the resulting consumer per-

ception that they were of professional quali-

ty and professionally endorsed. Salons some-

E-45

times serve as springboards enabling salon

brands to gain entrance to the larger OTC

trade, as in the cases of Clairol, Vidal

Sassoon and L'Oreal. Some brands are widely

distributed for retail through both salons

and OTC outlets on a regular basis. Revlon

Flex, for example, is highly successful in

both channels of distribution. There is also

evidence suggesting that unauthorized di-

version to OTC outlets of brands intended

for sale exclusively in salons is extensive,

In fact, widespread diversion of Jhirmack

products was one of the reasons that Jhir-

mack turned to distribution through OTC

channels.

The manner of Playtex's promotion of

Jhirmack shampoos shows that Playtex's

marketing experts expected that a profes-

sional image could be sold outside the

salons, and at prices which were relatively

high by OTC standards. The salon back-

ground, professional quality, and special-

E-46

ized formulation of Jhirmack products

are the central themes stressed in Play-

tex's marketing strategy.

(3) Distinct Customers

As has been shown above, OTC outlets

offer shampoos and conditioners which are

not only interchangeable with those sold in

salons in terms of ingredients, but which

also feature the professional formulation

and endorsement characteristic of salon pro-

ducts. Customers seeking such characteris-

tics can find them among OTC products.

However, evidence tending to show that

consumers who patronize salons tend to buy

these kinds of products only in salons

would support finding a submarket within

the broader market. For example, in

Columbia Broadcasting System, Inc. v.

F.T.C., 414 F.2d 974, 979 (7th Cir. 1969),

the court noted that members of record

clubs had a distinctive "demand function"

setting them apart from consumers who pur-

E-47

chased the same kinds of records through

other channels of distribution. In United

States v. Grinnell Corp., 384 U.S. 563,

574 (1965), the Supreme Court noted, in

finding a market composed of accredited

central station alarm services, that "some

customers will be unwilling to consider

anything but central station protection" in

choosing alarm systems. See Knutson v.

Daily Review, Inc., 548 F.2d 7°5, 804

(9th Cir. 1976) (submarket analysis should

have inguired into whether readers tended to

subscribe to both metropolitan and satellite-

city newspapers or only one type).

There is testimony tending to support

plaintiffs' claim that Jhirmack shampoos

and conditioners "appealed to a distinct

group of customers, i.e., those persons who

frequented salons and were willing to pay

a higher price for what they believed to be

a superior product because it was endorsed

and sold through the salon,"

E-48

There is also evidence, however, of sur-

veys tending to show that customers who buy

shampoo and conditioner at salons also buy

them at OTC outlets. Salon customers whose

purchases of salon shampoo or conditioner

run out between appointments buy more ina

"drugstore or supermarket, whichever is con-

venient."

Other testimony indicates that consumers

of hair products, generally, "use many dif-

ferent brands at the same time, varying

brands constantly." and that "customers

are constantly changing their desires."

Shampoo types have short life cycles and in

this respect "shampoos have the characteris-

tics of a fashion good." "Brand loyalty is

low' interchangeability is high."

Price competition, too, can prompt salon

customers to turn to OTC outlets for shampoo

and conditioner. The relatively high prices

charged by salons caused them to lose sales

to OTC outlets. The extensive evidence show-

E-49

ing that salons opposed diversion of their

brands into OTC outlets and that diversion

cut into their sales suggests that many

customers switched from buying an exclusive

brand in their salons to buying it in OTC

outlets instead once it became available

there.

Some shampoo and conditioner brands

prominent in salons are also regularly sold

in OTC channels and the salon prices for

these brands are kept low enough to compete

with the OTC prices. This reflects an ex-

pectation that customers who buy these

brands in salons might choose to buy them

elsewhere if the price differential bet-

ween the two channels of distribution were

any greater.

While, according to this evidence,

there may be customers who generally buy

shampoos and conditioners only in salons,

there is no substantial evidence establish-

ing the existence or size of such a class,

E-50

On the other hand there is considerable

evidence indicating that many salon custom-

ers, for reasons of price or convenience,

are willing to purchase these products at

OTC outlets.

(4) Prices and Price Sensitivity

Comparison between the price levels

within an alleged submarket and those with-

out offers some evidence of the degree of

cost-elasticity of demand between the two

channels. ‘If prices in an alleged sub-

market are significantly higher than those

for otherwise reasonably interchangeable

products sold elsewhere, an inference of

absence of price competition may arise.

Plaintiffs contend that because sham-

poos and conditioners are sold at retail

in the salon trade at substantially higher

prices, and with higher mark-ups, than in

OTC outlets, the two channels of trade

are not competitive. Defendants argue that

the existence of a substantial price overlap

E-51

for all shampoos and conditioners, re-

gardless of outlet, refutes that contention.

Relative Price levels

That the prices of shampoos and con-

ditioners sold in salons are higher as a

group than the prices of shampoos and condi-

tioners sold in OTC outlets, as a group, is

undisputed. Many salon brands, because of

prestige and limited availability, command

premium prices,

Plaintiffs showed, moreover, that

Jhirmack's sales of shampoo and conditioner

increased substantially in the several years

preceding its move into the OTC trade at

the same time that its products were sold

at retail prices much higher than the OTC

prices of comparable products or the prices

of Jhirmack products diverted to OTC outlets.

In Photovest Corp. v. Fotomat Corp., 606 F.2d

704, 713 (7th Cir. 1979), cert. denied,

445 U.S. 917 (1980), Fotomat's ability to

charge distinctive prices while increasing

E-52

its sales was an important factor sup-

porting the district court's finding of a

separate submarket consisting of drive-

through photo processing. In appraising

the validity of the claim of a submarket

consisting generally of shampoos and condi-

tioners which are sold in salons, however,

the court needs to look beyond the experience

of one firm to that of the trade. The evi-

dence suggests that the salon trade as a

whole enjoyed a substantial increase in

retail shampoo sales, at least between

1976 and 1980, but does not indicate

whether that increase was shared by premium-

priced brands or occurred largely among

brands sold at lower prices. Thus there is

no evidence that the salon trade in general

was able to maintain higher retail prices

without competitive disadvantage.

A number of the best selling brands

in the salon trade are also distributed to

OTC outlets on a regular basis. No evi-

E-53

dence was presented showing the salon prices

of these dually distributed brands. There is

no reason to assume that the salon prices

for these brands are substantially higher

than the OTC prices, and certain evidence

suggests that in fact they are not. The

testimony establishes that salons could not

maintain their price levels for products

like Jhirmack if the same product were

widely available to the consumer through OTC

outlets, and that the salons' ability to

charge a premium price for a certain brand

depends on limited availability of that

brand. Thus one would expect that the

wider availability of the dually distributed

brands would act as a check on salon prices

of those brands. That many salons stopped

_ Carrying Jhirmack when it became known that

it would be distributed by Playtex in the

OTC trade indicates that they expected the

competitive price to be substantially lower.

A similar drop in the number of salons car-

E-54

rying Vidal Sassoon occurred when its

manufacturers pursued distribution in

the OTC trade.

Plaintiffs have shown that the salon

retail p’ ves of brands manufactured ex-

clusively for salons were substantially

higher than prices of the same products

sold in OTC outlets through diversion.

It appears that when diversion of an exclu-

sive brand like Jhirmack is slight,. the

limited availability of the product in OTC

outlets at substantially lower prices does

not impinge on saicns’ ability to maintain

the regular premium price. When diversion

of an exclusive brand becomes extensive

enough to cut into a salon's sales of

that brand, salons tend to discontinue that

brand and find another. Thus widespread

diversion of an exclusive salon brand pro-

vides a competitive check on the salon's

ability to sell that brand at a premium

price.

E-55

Price range overlap

A study of price distribution for

shampoos at six major types of retail

outlets showed that the price ranges at

some salons and at some drug, food, and

mass merchandise outlets overlap by about

half a dollar, approximately a quarter of

the OTC price range and a fifth of the

salon's price range. Conditioner prices

at salons overlap by about six dollars

with the price ranges at drug, food and mass

merchandise outlets, approximately three

quarters of the OTC price range and half

of the salon price range.

Defendants cite cases rejecting sub-

markets which rely on evidence of an over-

lap of prices between products in an al-

leged submarket and those in the broader

market. In Brown Shoe, 370 U.S. at 326,

the Supreme Court affirmed the district

court's finding that "“medium-priced” shoes

competed with "low-priced" shoes, and re-

E-56

jected as “unrealistic" defendant's

"contention that, for example, men's shoes

selling below $8.99 are in a different

product market from those selling above

$9.00" In United States v. Jos. Schlitz

Brewing Co., 253 F.Supp. 129 (N.D. Cal.),

aff'd per curiam, 385 U.S. 37 (1966), de~-

fendant contended that premium and non-pre-

mium beer constituted separate lines of

commerce. The district court, observing

that beer prices ranged over a wide spectrum,

declared that there was "no rational’way of

chosing a point along this price spectrum

and saying that all beer which sells above

that point constitutes a line of commerce,

Or even a sub-market, apart from all beer

which sells below that point. This is pre-

cisely what the Supreme Court refused to

do in Brown Shoe... ." Id. at 145,

Nevertheless, even though the price ranges

of two sets of products overlap, they may

be sufficiently distinct to indicate a

lack of significant price competition

E-57

between the products. See P. Areeda and

D. Turner, 2 Antitrust Law 420 (1978).

The existence of a price overlap, there-

fore, although relevant, is not deter-

minative of the issue of price competition.

Viewing the evidence as a whole, it

establishes neither an absence of price com-

petition between salons and OTC outlets nor

a lack of sensitivity of salon prices to

OTC pricing levels. Although salons are

able to charge premium prices for certain

brands under conditions of exclusivity and

Scarcity, their price range overlaps sig-

nificantly with OTC prices and their com-

petitive behavior is sensitive to that of

OTC outlets.

(5) Specialized Vendors

Plaintiffs contend that salons consti-

tude a distinct channel of distribution sub-

stantially insulated from the competition

of other vendors of shampoo and conditioners

because of the salon's ability to provide

E-58

specialized services to customers and to

offer exclusive brands.

Plaintiffs argue that customers are

willing to pay premium prices to get a

specialized service consisting of person-

alized advice on what products to buy and

how to use them. Hairdressers customarily

recommend to their patrons the purchase of

certain hair products sold by the salon for

home use. These products are often formula-

ted for specific hair types and hair problems.

The hairdressers learn how to prescribe the

right product in a convincing manner at

educational programs conducted by manufac-

turers of salon products as a major part of

their sales effort. In this fashion, manu-

facturers use the hairdressers as a "sales

force."

Some consumers do value a hairdresser's

advise regarding selection of hair products

for home use and are willing to pay for it.

But the evidence is not convincing that they

E-59

need such advice. Interested consumers are

normally able to tell from the advertising

and packaging which products to purchase

for their own kind of hair or hair problem.

Some brands sold in OTC outlets have pre-

cisely the same ingredients and uses as

those sold in salons, and consumers are

capable of making the right selection un-

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